How the affordability calculation works
Lenders judge affordability mostly by your debt-to-income ratio (DTI): monthly debt payments divided by gross monthly income. The long-standing rule of thumb has two parts:
- Front-end ratio 28% — the full housing payment (principal, interest, taxes, insurance, PMI and HOA) should be no more than 28% of gross income.
- Back-end ratio 36% — housing plus all other debt payments should be no more than 36%.
The 36% figure matches Fannie Mae’s maximum for manually underwritten loans; Fannie Mae allows up to 45% with strong credit and reserves, and up to 50% for loans approved through its automated Desktop Underwriter system. Being approved at a higher ratio is not the same as being comfortable at it, which is why the calculator lets you set your own limits.
The formula
Budget = min(income/12 × front%, income/12 × back% − debts)
Payment = (Price − Down) × k + Price × tax%/12 + insurance/12 + HOA [+ PMI]
k = r / (1 − (1 + r)^−n) (payment per $1 borrowed)
Solve Payment = Budget for Price:
Price = (Budget − insurance/12 − HOA + Down × k) / (k + tax%/12)
If the result leaves you with less than 20% down, PMI is added (PMI rate ÷ 12 per dollar borrowed) and the price is solved again, so the answer always includes the PMI you would actually pay.
Worked example
Household income $100,000, $400 a month in other debts, $40,000 saved, 30-year loan at 6.5%, 0.89% property tax, $1,800 insurance, 0.5% PMI:
| Gross monthly income | $8,333.33 |
|---|---|
| 28% front-end budget | $2,333.33 |
| 36% back-end budget (3,000 − 400) | $2,600.00 |
| Housing budget used | $2,333.33 |
| Maximum home price | $327,961 |
| Loan amount | $287,961 |
| Principal & interest | $1,820.11 |
| Property tax | $243.24 |
| PMI | $119.98 |
Making the number real
- Keep cash for closing. Closing costs typically run 2% to 5% of the price according to Freddie Mac; don’t put every dollar of savings into the down payment. Estimate them with the closing cost calculator.
- Test the rate. The table under the results shows how the maximum price moves if rates are a point higher or lower.
- Budget beyond the lender. DTI uses gross income and ignores childcare, commuting, maintenance and savings goals. A payment well under the limit leaves room for those.
Frequently asked questions
What is the 28/36 rule?
A guideline that your housing payment should be at most 28% of gross monthly income and your total debt payments at most 36%. It is a starting point; lenders may approve higher ratios.
Should I use gross or take-home pay?
Lenders use gross (pre-tax) income, so the calculator does too. If you want a more conservative budget, lower the ratios.
Does the calculator include closing costs?
No. It assumes all of the savings you enter go to the down payment. Subtract your expected closing costs from savings first if you need to cover both.
Why does a small change in rate change the price so much?
The budget is fixed, so a higher rate means more of it goes to interest and less supports principal. At 6.5% on 30 years, each extra percentage point lowers the loan you can carry by roughly 10%.
Sources
- Fannie Mae Selling Guide, B3-6-02, “Debt-to-Income Ratios” (April 2, 2025)
- Freddie Mac, “Understanding homebuying costs,” My Home by Freddie Mac (accessed September 2026)
- Freddie Mac, “Breaking down PMI,” My Home by Freddie Mac (accessed September 2026)
- U.S. Census Bureau, American Community Survey 2024 1-year estimates, table B25103 (median real estate taxes paid) and table B25077 (median value, owner-occupied units)