How to Determine How Much House You Can Afford
Lenders use two key ratios to determine your maximum mortgage. The front-end ratio (housing costs / gross income) should be at most 28%. The back-end ratio (all debts / gross income) should stay below 36%. From these, the maximum affordable payment is: Max Payment = Gross Monthly Income × 0.28. Then solve the mortgage formula for P: P = M × [(1+r)^n − 1] / [r(1+r)^n], where M is your max payment, r is the monthly rate, and n is the number of payments. For example, with $8,000/month income, your max PITI is $2,240 — supporting roughly a $350,000 home at 6.5% over 30 years with 20% down.