How to Calculate Mortgage Affordability
Mortgage affordability depends on more than just income. Learn the four-factor framework lenders use — DTI, LTV, credit score, and reserves — and how to calculate the home price you can realistically afford at current rates.
The four factors lenders weigh
Affordability by income at 7.25% (30-year fixed)
Assumes: no existing debt, 10% down, $500/month taxes + insurance. Max PITI uses the 28% front-end guideline.
| Annual income | Gross/month | Max PITI (28%) | Max total debt (36%) | Loan amount | Home price (10% down) |
|---|---|---|---|---|---|
| $80,000 | $6,667 | $1,867 | $2,400 | $212,000 | $236,000 |
| $100,000 | $8,333 | $2,333 | $3,000 | $268,000 | $298,000 |
| $120,000 | $10,000 | $2,800 | $3,600 | $323,000 | $359,000 |
| $150,000 | $12,500 | $3,500 | $4,500 | $406,000 | $451,000 |
| $200,000 | $16,667 | $4,667 | $6,000 | $543,000 | $603,000 |
5 steps to calculate your number
- Step 1 Calculate your gross monthly income
Include all documentable income: base salary, overtime (2-year average), bonuses (2-year average), rental income (75% of gross rent), self-employment net income (2-year average from Schedule C). Do not include non-documentable cash income — lenders cannot use it.
- Step 2 Apply the 28/36 rule as a starting point
Multiply gross monthly income by 0.28 for your maximum housing payment (PITI). Multiply by 0.36 for your maximum total debt. Subtract your existing monthly debt payments from the 36% figure to get the housing budget the back-end rule implies. Use the lower of the two as your starting budget.
- Step 3 Calculate the loan amount from your monthly budget
Subtract estimated taxes and insurance from your PITI budget to isolate principal + interest (P&I). Use the mortgage payment formula or the affordability calculator to find the loan amount that produces that P&I payment at the current rate. Example: at 7.25%, a $1,800/month P&I payment supports a loan of approximately $265,000.
- Step 4 Add your down payment to get your price range
Add your down payment to the loan amount. Account for closing costs (2–5% of purchase price) — these come from cash at closing, not the loan. If you have $60,000 saved, allocate $15,000 for closing costs, leaving $45,000 for down payment. On a $265,000 loan with 15% down ($46,765), the home price is about $311,000.
- Step 5 Stress test against rate changes and life events
Run the same calculation at 8% and 8.5% if you are considering an ARM or if rates might rise. Ask: can I still afford this payment if my income drops 15%? If the answer is no, consider a lower price. The CFPB recommends keeping total housing costs (PITI + HOA) under 30% of gross income as a sustainable long-term target.
PMI and its effect on affordability
Private mortgage insurance adds $100–$300/month for buyers with less than 20% down. This directly reduces your housing budget by that amount. For a buyer with a $2,500/month PITI budget:
With PMI (10% down)
PMI: ~$175/month
Available for P&I: $2,500 - $500 taxes/insurance - $175 PMI = $1,825/month
Loan supported: ~$213,000
Without PMI (20% down)
No PMI cost
Available for P&I: $2,500 - $500 taxes/insurance = $2,000/month
Loan supported: ~$233,000
Common questions
How much house can I afford on a $100,000 salary?
At $100,000 gross annual income ($8,333/month), the standard 28% front-end DTI guideline puts your housing budget at $2,333/month for PITI. At 7.25% on a 30-year loan with $500/month in taxes and insurance, that implies a loan amount of around $268,000 — or a home price of about $298,000 with 10% down. At 43% back-end DTI, if you have $500/month in other debts, your maximum PITI drops to $3,083 - $500 = $2,583/month, supporting a loan of roughly $300,000. Use the affordability calculator to model your exact situation.
What percentage of income should go to mortgage?
The classic guideline is 28% of gross monthly income toward PITI (principal, interest, taxes, insurance) — the "front-end" rule. A more pragmatic approach is the 25% rule applied to net (take-home) income, which accounts for taxes. In high-cost markets, many buyers stretch to 35–40% of gross because there is no alternative. The key constraint is actually DTI (debt-to-income), not a fixed income percentage — lenders look at your total debt load, not just the housing payment.
Does affordability change if I put more down?
Yes, in two ways. First, a larger down payment reduces the loan amount, lowering your monthly payment directly. Second, crossing key LTV thresholds (95%, 90%, 80%) reduces or eliminates PMI, saving an additional $100–$300/month. At 80% LTV or below, PMI disappears entirely. The tradeoff: cash used for a larger down payment is illiquid. Most financial planners suggest maintaining 3–6 months of expenses in liquid reserves after closing.
How do lenders calculate affordability differently from the 28% rule?
Lenders use automated underwriting systems (Fannie Mae's Desktop Underwriter, Freddie Mac's Loan Product Advisor) that weigh multiple factors simultaneously — not just a single ratio. A borrower with 750 credit, 20% down, and 6 months reserves may be approved at 50% DTI. A borrower with 620 credit, 3.5% down, and no reserves may be capped at 43% DTI. The 28/36 rule is a planning heuristic, not a lender formula.
Does the stress test affect affordability in Canada?
Yes significantly. The Canadian mortgage stress test requires borrowers to qualify at the higher of 5.25% or their contract rate + 2%. At a contract rate of 5.0%, you qualify at 7.0%. At 6.0%, you qualify at 8.0%. This reduces the qualifying loan amount by 15–20% compared to qualifying at the contract rate alone. It is the primary reason Canadian buyers with the same income qualify for less than US buyers at equivalent rates.