How Lenders Determine Your Affordability
Mortgage lenders assess your affordability using multiple factors, but the most important is your Debt-to-Income (DTI) ratio. This metric compares your monthly debt obligations to your income and helps lenders evaluate your borrowing capacity.
Understanding Debt-to-Income Ratio (DTI)
Your DTI ratio helps lenders assess whether you can handle additional debt. It's calculated as:
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
Most lenders follow these DTI guidelines:
| Loan Type | Max DTI Allowed |
|---|---|
| Conventional Loan | 43% |
| FHA Loan | 50% |
| VA Loan | 41% |
| USDA Loan | 41% |
Example: How Much Home Can You Afford?
Let's assume the following financial scenario:
- Monthly Gross Income: $6,000
- Monthly Debt Payments: $600 (car loan + credit cards)
- DTI Calculation: (600 ÷ 6000) × 100 = 10% DTI
If you have a 43% max DTI (for a conventional loan), your max total debt obligation would be:
43% of $6,000 = $2,580 total allowable debt payments
Since you already have $600 in debt payments, that leaves $1,980 available for a mortgage payment.
Other Affordability Factors
- Down Payment: A larger down payment reduces loan costs.
- Credit Score: Higher scores get better interest rates.
- Interest Rate: Lower rates mean lower monthly payments.
- Property Taxes & Insurance: These must be factored into your total housing costs.
Using a Mortgage Affordability Calculator
Instead of manually calculating affordability, use our freeHome Affordability Calculatorto get instant estimates.
“A mortgage should fit comfortably within your budget—not stretch you thin.”
— Sarah Thompson, Financial Advisor
Frequently Asked Questions
What percentage of my income should go to a mortgage?
Most lenders recommend keeping your housing costs below 28-30% of gross income.
Can I qualify for a mortgage with a high DTI?
Some lenders approve loans with DTI up to 50%, but it may come with higher interest rates.
What’s the safest way to determine affordability?
Factor in your lifestyle, future expenses, and emergency savings before committing to a mortgage.