Lotus Calculator

How Much House Can I Afford?

This calculator helps estimate an affordable house purchase amount based on your household income, debts, down payment, and desired debt-to-income (DTI) ratios. It is mainly intended for use by U.S. residents.

Understanding Debt-to-Income (DTI) Ratios

Lenders use two main DTI ratios to determine how much money they are willing to loan:

• Front-End Ratio (Housing Ratio): This is your total monthly housing costs (Principal, Interest, Taxes, Insurance - PITI, plus HOA fees) divided by your gross monthly income.

`Front-end DTI = (Monthly Housing Costs / Gross Monthly Income) * 100%`

• Back-End Ratio (Total Debt Ratio): This includes all your monthly housing costs plus all other recurring monthly debts (like car loans, student loans, credit card payments) divided by your gross monthly income.

`Back-end DTI = (Monthly Housing Costs + Other Monthly Debts / Gross Monthly Income) * 100%`

A lower DTI generally means less risk for lenders, potentially leading to more favorable loan terms.

Common DTI Rules

• Conventional Loans (28/36 Rule): Typically, lenders prefer a front-end DTI no higher than 28% and a back-end DTI no higher than 36%. If your down payment is less than 20%, Private Mortgage Insurance (PMI) is usually required, which is factored into your housing costs.
• FHA Loans (31/43 Rule): Insured by the Federal Housing Administration, FHA loans often allow for higher DTI ratios, typically up to 31% for front-end and 43% for back-end. FHA loans have their own mortgage insurance premium (MIP) requirements.
• VA Loans (Back-End 41% Rule): Guaranteed by the U.S. Department of Veterans Affairs for eligible veterans and service members. VA loans primarily focus on a back-end DTI of around 41% and generally do not require a down payment or PMI.
• Custom DTI Ratios: You can also select custom DTI ratios. Lower percentages are more conservative, while higher percentages are riskier.

Factors Affecting Affordability

• Annual Household Income: Higher income generally means you can afford more.
• Monthly Debts: Lower existing debts free up more income for housing.
• Down Payment: A larger down payment reduces the loan amount needed and can eliminate PMI on conventional loans.
• Interest Rate: A lower interest rate reduces your monthly P&I payment.
• Loan Term: Longer terms (e.g., 30 years) mean lower monthly P&I payments but more total interest. Shorter terms (e.g., 15 years) have higher P&I payments but save on total interest.
• Property Taxes, Home Insurance, HOA Fees: These add to your total monthly housing cost.

What If I Can't Afford the House I Want?

• Reduce Other Debts: Pay down credit cards, car loans, or student loans.
• Improve Credit Score: A higher credit score can help you qualify for a lower interest rate.
• Increase Down Payment: Save more for a larger down payment.
• Increase Income: While challenging, a higher income directly improves affordability.
• Consider a Less Expensive Home: Adjusting expectations might be necessary.
• Look into Housing Assistance Programs: Some local programs may help low-to-moderate-income buyers.