f you’re a future homebuyer, you might have used one of those “How much mortgage can I afford?” calculators online. These calculators typically gather information like your down payment amount, credit score range, monthly or annual income and debts.
Then, they’ll spit out an estimate of what a bank might lend you mortgage-wise.
These calculators work primarily by figuring out your debt-to-income ratio and then how much you can afford to pay for your monthly mortgage payment. This is similar to how banks decide how much to lend you.
The typical bank limit on monthly mortgage payments is about 28 percent of your gross monthly income. Therefore, the bank thinks you can devote up to 28 percent of your household income to your mortgage payment and expenses (including taxes, insurance and association dues).
Banks will also typically allow a total debt-to-income ratio of up to around 36 percent. This means that your mortgage, credit card payments, student loan payments and car payments shouldn’t exceed 36 percent of your total monthly income. (Note that if your other debt payments are already at 15 percent of your monthly income, you only have 21 percent of your income to devote to your mortgage, regardless of the 28 percent rule.)
So when you put your current income and expenses into a house affordability calculator, it will tell you how much you can afford to pay for your home per month. Then, based on factors such as estimated interest rate, tax payments, insurance payments and available down payment, it’ll tell you how much house, in total, you can afford.