Mortgage Affordability Calculator

Mortgage underwriting caps borrowing by two debt-to-income ratios rather than by the house price directly. The front-end or housing ratio compares the full PITI payment - principal, interest, taxes and insurance, plus HOA dues and mortgage insurance where they apply - to gross monthly income, and is conventionally capped at 28 percent. The back-end ratio adds every other recurring obligation reported on the credit file, such as car notes, student loans and minimum card payments, and is capped at 36 percent. The binding constraint is whichever produces the smaller housing budget, so a borrower with 1,200 dollars of monthly debt on 12,500 dollars of gross income is limited by the back-end test at 3,300 dollars rather than by the 3,500 dollar front-end figure. Working backward from that budget requires an iteration, because property tax is a function of the purchase price that the calculation is trying to find. The routine subtracts insurance and HOA, guesses a price, computes tax at the effective millage, converts the residual principal-and-interest capacity into a loan balance through the present-value annuity factor, and repeats until the price stops moving. Effective property tax rates in the United States range from roughly 0.3 percent in Hawaii to over 2 percent in New Jersey and Illinois, so location alone can swing the answer by tens of thousands of dollars. Several limits apply: the model omits private mortgage insurance, which typically costs 0.3 to 1.5 percent of the loan annually below 20 percent down, ignores compensating factors such as reserves or credit score, and reflects gross rather than after-tax income. Program overlays differ too - FHA commonly permits 31/43 and Fannie Mae's automated underwriting has approved back-end ratios up to 50 percent.

The 28/36 convention descends from the underwriting manuals of the Federal Housing Administration, established by the National Housing Act of 1934 to insure long-term amortizing mortgages after the collapse of the balloon-loan market. Early FHA and Veterans Administration guidelines expressed capacity as a multiple of income or as a fixed share of earnings, and by the postwar decades a rule of thumb of about 25 percent of income for housing was widespread. When Fannie Mae was privatised in 1968 and Freddie Mac chartered in 1970, the secondary market needed uniform, machine-checkable standards for loans it would purchase, and the paired housing and total-debt ratios became those standards. The thresholds loosened and then tightened again. Automated underwriting systems - Fannie Mae's Desktop Underwriter and Freddie Mac's Loan Prospector, both launched in 1995 - began trading ratio limits against credit score and reserves, and during the 2003 to 2006 lending boom stated-income and interest-only products effectively suspended the tests. After the financial crisis, the Dodd-Frank Act of 2010 directed the Consumer Financial Protection Bureau to define an ability-to-repay standard; the resulting Qualified Mortgage rule, effective January 2014, imposed a hard 43 percent back-end limit outside a temporary exemption for agency-eligible loans. The CFPB replaced that with a price-based test in 2021, but the 28/36 pair survives as the practical planning benchmark lenders and counsellors still quote.