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Home Affordability Calculator

Unsure how much you can afford to spend on a house? Use this calculator to figure home loan affordability from the lender's point of view.

Input Information
Loan Information
Down Payment :
Interest Rate : See Current Rates (%)
Length : (Yrs)
Estimated Front Ratio : (%)
Estimated Back Ratio : (%)
Income Information Debt Payment Information
Income 1 : ($) Auto Loans : ($)
Income 2 : ($) Student Loans : ($)
Income 3 : ($) Installment : ($)
Income 4 : ($) Revolving accts : ($)
Income 5 : ($) Other Debt : ($)
Taxes And Insurance Information
Annual Taxes :
Annual Insurance :
Annual PMI :
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Find Affordable Housing

Buying a home can be expensive. The U.S. Census Bureau stated that the average price of a home in the United States was $272,900 in 2010, the last year for which the data was available. If you live in large metropolitan areas like New York or Los Angeles, you can expect to pay even more.

Overleveraged Homeowner.However, understanding whether you can afford to buy a home depends on much more than just the selling price. Unless you've spent the last several years socking away everything you've earned, or you've come into a large inheritance or won some money, chances are good that you'll need to get a loan to pay for your home.

Bloomberg News reported that the current interest rate for 30-year fixed mortgage, as of Nov. 29, 2013, is 4.38 percent. With that interest on an average-priced home of $272,900, you would end up paying $217,907.58 in interest, for a total of $490,807.58 over the life of the loan.

Of course, interest rates can fluctuate based on market conditions, as well as your own personal financial information, such as your credit score, debt-to-income ratio, and the size of your down payment.

Determining How Much You Can Afford

When mortgage lenders evaluate your ability to afford a loan, they consider all the factors in the loan, such as the interest rate, private mortgage insurance and homeowner's insurance. They also consider your own financial profile, including how the monthly mortgage payment will add to your overall debt and how much income you are expected to make while you are paying for the home.

Front-End Ratio vs Back-End Ratio

Two criteria that mortgage lenders look at to understand how much you can afford are the housing expense ratio, known as the “front-end ratio,” and the total debt-to-income ratio, known as the “back-end ratio.”

Front-End Ratio

The housing expense, or front-end, ratio is determined by the amount of your gross income used to pay your monthly mortgage payment. Most lenders do not want your monthly mortgage payment to exceed 28 percent of your gross monthly income. The monthly mortgage payment includes principle, interest, property taxes, homeowner's insurance and any other fees that must be included. These costs are commonly referred to as PITI, which is derived from: pincipal, interest, tax & insurance.

FRONT END RATIO FORMULA:
FER = PITI / monthly pre-tax salary; or
FER = PITI / (annual pre-tax salary / 12)

To determine how much you can afford for your monthly mortgage payment, just multiply your annual salary by 0.28 and divide the total by 12. This will give you the monthly payment that you can afford.

Some loans place more emphasis on the back-end ratio than the front-end ratio. In the next section we will display a table of widely used loan programs, along with the limits associated with each.

Back-End Ratio

The debt-to-income, or back-end, ratio, analyzes how much of your gross income must go toward debt payments, including your mortgage, credit cards, car loans student loans, medical expenses, child support, alimony and other obligations. Most lenders do not want your total debts, including your mortgage, to be more than 36 percent of your gross monthly income.

Determining your monthly mortgage payment based on your other debts is a bit more complicated. Multiply your annual salary by 0.36 percent, then divide the total by 12. This is the maximum amount you can pay toward debts each month. Subtract your other debts — including your car payment, your student loan payment and other debt payments — from this amount to determine the maximum amount you can spend on your monthly mortgage payment.

Once you have the two numbers and a sense of the interest rate you may qualify for, you can use a mortgage calculator to determine the cost of the home that you can afford.

BACK END RATIO FORMULA:
FER = (PITI + all other monthly debt payments) / monthly pre-tax salary; or
FER = (PITI + all other monthly debt payments) / (annual pre-tax salary / 12)

The above calculator gives you all the answers you need in one stop — determining your front- and back-end ratios and compares it to the interest rate on the loan and the length of the loan. You can also enter information about the annual taxes and insurance on the home. You'll get a clear picture of just how much home you can afford in moments, with the results e-mailed to you in a plain-English and easy-to-understand format. Just enter your e-mail and you can even have a copy of your information saved for later & available to show lenders other real estate professionals.

Here is a table of common mortgage programs, who they cater to & what their limits are. Different lenders have different criteria for their maximum front- and back-end ratios and other factors that consider to determine how much you qualify to borrow. In particular, loan programs from the U.S. Department of Agriculture, Veterans Affairs and the Federal Housing Administration have very stringent criteria, which may also include specific caps on your income, regardless or how low your debt levels are.

Loan Who Should Use? Frontend DTI Backend DTI Top Backend Downpayment Additional Advice & Information
Baseline   28% 36%   20% Historical baseline for a great home buyer who qualifies for a competitive APR. 35% of borrowers who finance put at least 20% down - about 2/3 don't. Those who don't are usually required to get PMI until LTV drops below 80%.
Conventional Most home buyers back-end ratio more important 36%-43% 45%-50% 3% to 20% Every lender decided based on a variety of factors. Most borrowers choose FRM over ARM loans. 30-year FRM is the most popular option. MIP is similar to PMI, though lasts onger.
FHA Borrowers with poor credit scores & limited downpayment 31% 43% 57% 3.5% Higher ratios also require compensating factors for loan approval. Credit score above 580 ok, credit score from 500-579 require 10% downpayment.
VA Active duty military members & veterans back-end ratio more important 41% ~ 47% 0% Each veteran is considered based on a variety of factors. Approvals above 41% require an explanation. Both BAH and BAS are counted as income to help borrwers qualify. Loans have a relatively small funding fee.
USDA Low-income rural 29% 41% 41% 0% Maximum allowable income is 115% of local median income. Most of the land mass of the nation outside of large cities qualify for USDA. Top backend limit rises to 44% with PITI below 32%. A small funding fee of about 1% is added to the loan.

Renting or Buying?

Of course being able to buy something does not mean that one necessarily should. Owning a home is both a significant commitment and a serious lifestyle choice. Here are some other factors to consider beyond the above financial ratios.

  • Do you plan on living in the area for an extended period of time? Real estate transactions are typically large, leveraged, high-friction transactions. Between closing costs, real estate commissions & other related fees, many home buyers may spend about eight or nine percent of the home's price between buying and selling it. If you live in a place for a significant period of time the home appreciation can more than offset any costs, but if you only live there a couple years before moving again it is likely to cost you as the first few years of a loan's payments go primarily toward interest.
  • How secure is your source of income? If your job may require you to move then owning a home may harm your career flexibility. If you are in a field with high employee churn then renting may be a better option.
  • Will you be adding to your family in the near future? If you buy a house & quickly outgrow it, there's no guarantee that it will be easy to simulaneously sell your current home and buy a larger one.
  • What are the local market conditions? Some markets like Phoenix or Las Vegas may be cheap to buy in, other markets like San Francisco and New York City are typically priced well above equivalent rent payments.