How this number is made
Lenders often cap the housing payment, and they cap housing plus other debts, as shares of gross monthly income. This page takes the tighter of those two ceilings, subtracts tax, insurance, and HOA, and turns what is left into a loan. Your down payment sits on top of that loan.
- Use gross income, before tax. Net pay makes the ceiling look too small.
- List monthly debts that will still exist after you buy: car, student loans, card minimums. Do not list rent you will leave.
- Twenty-eight and thirty-six are old rules of thumb. If a lender wrote different ratios, type those.
- Property tax and insurance are dollars, not a percent of the unknown price. Revise them after you have a real listing.
Formula
Housing payment = the smaller of (income × front ratio) and (income × back ratio − other debts). Loan payment = housing payment − monthly tax − insurance − HOA. Loan = that payment converted at the interest rate and term. Price = loan + down payment.
Worked example
On $95,000 a year, 28% of gross is about $2,217 a month and 36% is about $2,850. Four hundred dollars of other debt leaves about $2,450 under the back ratio, so 28% is tighter. After tax and insurance, the rest is principal and interest, then a 6.5% 30-year loan, plus the down payment.
Questions
Why isn’t the tax a percent of the home price?
The price is the answer, so a tax percent would depend on the number being solved. Type the annual tax you expect for homes in the range you are shopping. Then run it again if the result lands in a different price.
Does this include PMI?
No. Under 20% down, many loans add mortgage insurance. That payment would reduce what is left for principal and interest. The mortgage page has the same gap.