How Lenders Determine Your Mortgage Affordability
Mortgage lenders use your income, debts, credit score, and down payment to calculate how much you can borrow. The two main affordability rules are:
1. The 28/36 Rule
Most lenders follow the 28/36 rule, meaning:
- 🏡 Housing costs (mortgage, taxes, insurance) should be ≤ 28% of gross income.
- 📉 Total debt (including car loans, student loans, credit cards) should be ≤ 36% of gross income.
2. Debt-to-Income (DTI) Ratio
Your DTI ratio helps lenders determine affordability. Here’s how to calculate it:
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
Example:
- 💰 Monthly Income: $6,000
- 💳 Monthly Debts: $1,800
- 📊 DTI Ratio: (1,800 ÷ 6,000) × 100 = 30%
How Much House Can You Afford?
Let’s estimate your home affordability based on income. These numbers assume a 30-year mortgage at 6.5% interest.
| Gross Monthly Income | Max Monthly Payment (28%) | Home Price Estimate |
|---|---|---|
| $4,000 | $1,120 | $185,000 |
| $6,000 | $1,680 | $280,000 |
| $8,000 | $2,240 | $375,000 |
| $10,000 | $2,800 | $470,000 |
Factors That Affect Mortgage Affordability
Lenders consider several key factors when determining how much you can borrow.
- 📈 Credit Score – Higher scores get better mortgage rates.
- 📉 Down Payment – A larger down payment reduces loan size.
- 💳 Debt Load – Lower existing debts improve borrowing power.
- 🏡 Property Taxes & Insurance – These affect monthly costs.
How to Increase Your Home Budget
If you want to afford a more expensive home, consider these strategies:
- 📊 Improve your credit score to get a lower interest rate.
- 💰 Save for a larger down payment to reduce loan size.
- 🏡 Choose a longer loan term (e.g., 30 years vs. 15 years).
- 📉 Pay down existing debts to lower your DTI ratio.
Example: Two Homebuyers, Two Different Budgets
| Buyer Profile | Monthly Income | Debt Payments | Max Home Price |
|---|---|---|---|
| Buyer A (Low Debt, 10% Down) | $6,000 | $500 | $320,000 |
| Buyer B (Higher Debt, 5% Down) | $6,000 | $1,500 | $250,000 |
“Knowing your affordability helps you buy confidently and avoid financial stress.”
— Sarah Thompson, Mortgage Expert
Frequently Asked Questions
What’s the easiest way to calculate my affordability?
Use our Home Affordability Calculatorfor an instant estimate.
How much should I put down on a home?
A 20% down payment avoids PMI, but many buyers qualify with as little as 3-5% down.
Does getting pre-approved help determine affordability?
Yes! A mortgage pre-approval gives you a clear borrowing limit.