Home affordability: income, debts and a full budget

Convert gross annual household income to monthly income by dividing by 12. The housing limit is monthly income × the chosen housing ratio. The total-debt limit available for housing is monthly income × the chosen total DTI ratio − recurring nonhousing debt payments. The tool uses the smaller amount.

The default 28% housing and 36% total-debt ratios are editable planning assumptions, not universal lender rules. Do not mix net pay with a gross-income ratio, enter an annual debt amount in a monthly field, or deduct the same recurring debt again from both formulas. Actual underwriting also depends on factors outside this arithmetic.

The affordability model tests principal and interest, estimated property tax, homeowners insurance, HOA and conditional PMI against the monthly limit. A higher tax assumption can lower the home price that fits even when income and the mortgage rate are unchanged. Use the mortgage-with-PMI tool to inspect the payment components.

The model is not a complete household budget. Utilities, maintenance, transport, childcare, savings and irregular bills need separate estimates. Set a personal spending ceiling alongside the ratio result, and test changes to rate, tax and debt one at a time so you can explain what moved the maximum price.

Available down payment should be cash genuinely allocated to equity in the purchase. If savings also cover closing charges, moving or an emergency reserve, subtract those allocations before entering down payment. A larger down payment can lower principal and potentially PMI, but using every dollar can leave no buffer for ownership expenses.

Use the closing-cost calculator to build a separate cash worksheet and compare it with actual lender disclosures. Do not assume that a modeled affordable price establishes program eligibility, rate approval or a lender’s maximum loan. When quotes arrive, rerun the payment inputs using the real offer rather than a scenario rate.

For illustrative gross annual income of $100,000, monthly income is $8,333.33. At 28%, the housing limit is $2,333.33. At 36% with $500 monthly nonhousing debt, the other limit is $3,000 − $500 = $2,500. The modeled housing budget is therefore $2,333.33; the housing ratio binds.

Keeping income and ratios unchanged but increasing recurring debt to $1,000 reduces the other limit to $2,000. Total debt now binds, and housing budget falls by $333.33 per month. That does not translate to one fixed home-price reduction: rate, term, down payment, tax, insurance and PMI determine the price that fits. Closing charges and reserves remain separate in both cases.