Buying a home is a monumental decision. It's the quintessential American dream. You'll have to save up a down payment and then eventually find out how much you can technically afford. Mortgage math can seem like a black box so we're here to demystify it for you. Home affordability isn't the same as what you want to spend. It's how much your are allowed to. It all starts with you
Understanding your Debt to Income
- Gross monthly income: This is your total income before taxes and deductions. If you make $120K a year, then that's $10,000 a month
- Your monthly debt : make a list of your current monthly debt payments and then add them up. This should include minimum payments on credit cards, student loans, car loans, and other personal loans.
- Determine Your Debt-to-Income Ratio (DTI): Divide your total monthly debt payments by your gross monthly income. If you have $1,000 in monthly debt payments your DTI is 10%
Mortgages allowing DTI limits between 38-57% depending on the loan type and your credit score.
How loan types affect loan amounts
- DTI Ratios - Conventional loans are the most common type of loan and have DTI limits of 50% where as FHA loans (backed by the government) have flexible credit standards and a higher DTI limit of 57%
- Loan Amounts - Conventional loan limits are $766,550 in 2025 where FHA loans are limited to $498,500
- Front End and Back End Ratios - Conventional loans only use the 50% limit and included both housing and non-housing debt. FHA loans have an additional housing DTI ratio of 45% and total DTI ratio of 57%.
Property information matters
The housing payment is more than mortgage principal and interest. You'll also need to include
- Property taxes
- Homeowners insurance
- HOA fees (if applicable)
How to calculate affordability
- Use a Mortgage Calculator:
- Input your income, debt, loan type, interest rate, and loan term.
- Estimate your tax rate, insurance and HOA fees
- The calculator will show you your estimated monthly mortgage payment.
- Do it manually in google sheets to really understand the math:
- Start with your gross monthly income
- Subtract your monthly debt payments from gross monthly income.
- Subtract estimated monthly taxes, insurance, and HOA
- This remaining amount is your maximum mortgage principal and interest payment (P&!_PMT)
- Use the Present Value Formula where PV = )annual_interest_rate/12, loan_term_months, - P&I_PMT)
An Example calculation
- Gross Monthly Income: $10,000
- Monthly Debt Payments: $800
- Property Taxes, Insurance, HOA: 1,202
- Maximum Mortgage Payment: $10,000 x 50% - $800 - $1,202 = $2,998
- Max Loan Amount = 6%/12, 360, -$2998 = $500,000
Don't forget this!
Down Payments Matter: The larger your down payment, the more home you can afford. You'll just need to pay the difference between the max loan amount and the home price!
Don't Forget Closing Costs: Be prepared to pay closing costs when you purchase a home. These can include fees for appraisal, title search, and lender's fees and usually adds up to 3%. You'll need this in addition to your down payment.
Debt Payoff is Efficient: Paying off your credit card or car! is the easiest way to boost your homebuying budget because you are replacing short term debt with a much larger and longer mortgage payment.
Property Taxes and Insurance: can vary significantly based on location, property type, and other factors. Research these costs in your desired area to better estimate your max loan amount. Tax rates can vary from 1% to 4% in the country!
