Are you wondering how much you can qualify for when buying a home? Below are steps to calculate a rough estimate. This is a great tool to see whether or not it's worth a shot to move towards the next step of an official pre approval. If you're happy with the results let’s connect you with a lender if you don’t already have one. Just contact me using my information below.
Step 1: Calculate Your Debt-to-Income (DTI) Ratios
Lenders use your Debt-to-Income (DTI) ratio to see how much of your monthly income is used for debt payments, including your new mortgage.
A. Front-End Ratio (Housing Costs Only)
This ratio compares your monthly housing costs (mortgage or rent amount, property taxes, homeowners insurance) to your gross monthly income.
Find your monthly housing costs (mortgage + property taxes + homeowners insurance).
Example: Mortgage = $1,200, Property taxes = $300, Insurance = $100
Total housing cost = $1,200 + $300 + $100 = $1,600
Find your gross monthly income (before taxes).
Example: Gross monthly income = $5,000
Calculate the front-end ratio:
Formula:
Front-end ratio=(Monthly housing cost/Gross monthly income)×100Front-end ratio=(Gross monthly incomeMonthly housing cost)×100
Example:
(1600/5000)×100=32%(5000/1600)×100=32%
A front-end ratio of 32% means 32% of your income is going toward housing costs. Lenders prefer this to be 28% or less.
B. Back-End Ratio (All Debts)
This ratio compares your total monthly debts (including housing costs, car payments, student loans, credit cards) to your gross monthly income.
Add up all your monthly debts (housing costs + car payment + student loans, etc.).
Example: Total monthly debt = $1,600 (housing) + $300 (car payment) + $200 (student loan) = $2,100
Find your gross monthly income (same as before).
Example: Gross monthly income = $5,000
Calculate the back-end ratio:
Formula:
Back-end ratio=(Total monthly debt/Gross monthly income)×100Back-end ratio=(Gross monthly income/Total monthly debt)×100
Example:
(2100/5000)×100=42%(5000/2100)×100=42%
A back-end ratio of 42% means 42% of your income is used for all debt payments. Lenders generally allow 36%-43%, but this can vary based on the lender.
Step 2: Determine the Loan Amount You Can Afford
Now that you know your DTI ratios, you can estimate the loan amount based on your back-end ratio (since this includes all debts). Lenders typically prefer a back-end ratio of 43% or lower.
Use the back-end ratio to find out how much monthly mortgage payment you can afford.
Example:
You make $5,000/month, and the lender allows you to use 42% of your income for all debt payments.
Maximum total debt payment=5000×0.42=2100Maximum total debt payment=5000×0.42=2100
This means you can spend up to $2,100/month on all debts.
Subtract your other monthly debts (like car payment, student loan, etc.) from the total debt allowance to find how much you can afford for the mortgage.
Example:
Total debt allowance = $2,100
Other debts = $500 (car + student loan)
Maximum mortgage payment=2100−500=1600Maximum mortgage payment=2100−500=1600
You can afford a $1,600/month mortgage payment.
Step 3: Estimate Your Loan Amount Based on Monthly Payment
Use an online mortgage calculator or formula to estimate the loan amount based on your monthly mortgage payment and interest rate.
Interest rate: 6.977% (current rate for a 30-year fixed mortgage)
Loan term: 30 years
With a monthly payment of $1,600, a 6.977% interest rate, and a 30-year loan, the estimated loan amount would be around $250,000.
Step 4: Factor in the Down Payment
The loan amount is based on the purchase price of the home minus the down payment.
Decide how much down payment you can afford.
Example: You have $20,000 saved for a down payment.
Calculate the home price:
Loan amount = $250,000
Down payment = $20,000
Total home price = $250,000 + $20,000 = $270,000
Final Estimate:
With a $1,600/month mortgage payment, a 42% back-end ratio, and a $20,000 down payment, you can afford a home priced at about $270,000.
Hopefully this helps you decide your next move! Let me know how I can help.