Part of our guide to How Much House Can You Actually Afford?
This answers the lender's question: what would they approve? That is a genuinely different question from what you can live with, and knowing the difference is the point.
The maximum price a lender would approve, from your income, existing debts and deposit — and crucially, which of the two ratios is binding. If existing debt is the constraint rather than income, clearing a loan raises your budget more than saving the same amount.
How the calculation works
Lenders apply two caps against gross monthly income:
- Front-end ratio — housing costs alone, conservatively 28%
- Back-end ratio — housing plus every other debt payment, conservatively 36%
Whichever leaves less room is the one that binds, so the calculator takes the lower and tells you which it was.
Turning that budget into a price looks circular — property tax depends on the price, the price depends on the loan, the loan depends on what is left after tax. It resolves because tax is a rate on the price, which makes the relationship linear:
budget = (price − deposit)·k + price·taxRate/12 + insurance/12 + HOAwhere k is the monthly payment per dollar borrowed. Rearranging gives the price directly. PMI is handled in a second pass, because it only applies above 80% loan-to-value.
The test suite checks this by round-tripping: the price it returns, fed back into the mortgage calculator, must produce exactly the budget it started from.
How to read the result
"Limited by" is the most useful line. If it says existing debt, your borrowing power is constrained by your car loan or student loan rather than your salary — and clearing one of those frees room immediately.
The price is a ceiling, not a target. It uses gross income and counts only debts on your credit report. Childcare, commuting, groceries and retirement saving are invisible to it. That is not a flaw in the calculator; it is how lender approval works, and it is why approved buyers can still end up with nothing left each month.
Try a higher rate. A percentage point or two changes the affordable price substantially. If your plan only works at today's rate, it is fragile.
Important considerations
Use your real local property tax rate. It varies enormously between jurisdictions and is the largest source of error here.
The deposit is not the only cash you need — closing costs are separate and substantial. See what closing costs actually pay for.
Keep an emergency fund after buying. A house generates repair bills, and a buyer with no reserve meets the first one on a credit card.
For the method that produces a number you can actually live with — working backwards from take-home pay rather than forwards from gross — see how much house can you actually afford.
Related tools and reading
- Mortgage payment calculator
- How much house can you actually afford?
- How much down payment do you actually need?
- Rent vs buy — the arithmetic behind the argument
This is an estimate for general information, not a lending decision or financial advice — see our disclaimer.
Frequently asked questions
Why does this use gross income rather than take-home?
Because lenders do. That is precisely why the result is a ceiling rather than a budget — the ratio cannot see tax, childcare, commuting or saving.
What are the 28 and 36 percent figures?
The front-end ratio caps housing costs at 28% of gross income; the back-end ratio caps all debt payments at 36%. Many programmes allow higher, so treat these as a conservative default.
Why does paying off a car raise my budget so much?
Because the back-end ratio counts every monthly debt payment. Removing one frees room directly, and can raise borrowing power more than saving the same sum toward the deposit.
Does it include property tax and insurance?
Yes. Both sit inside the monthly payment through escrow, so leaving them out would overstate what you can afford by a considerable margin.
Should I buy at this price?
Almost certainly not. This is what a lender would approve. What you can comfortably carry is usually well below it.
Sources
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