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Loan Affordability Formula:
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The loan affordability calculator determines how much home you can afford based on your income, debts, and current interest rates. It helps potential homebuyers understand their borrowing capacity before applying for a mortgage.
The calculator uses the following formula:
Where:
Explanation: The formula calculates the maximum loan amount you can afford while maintaining a healthy debt-to-income ratio.
Details: Calculating loan affordability helps prevent overborrowing, ensures manageable monthly payments, and improves loan approval chances by meeting lender requirements.
Tips: Enter your gross monthly income (before taxes), desired debt-to-income ratio (typically 36%), current monthly debt payments, expected interest rate, and desired loan term (typically 30 years).
Q1: What is a good debt-to-income ratio?
A: Most lenders prefer a DTI below 36%, with no more than 28% going toward housing costs.
Q2: Should I include taxes and insurance?
A: This calculator focuses on principal and interest. For complete affordability, add 1-2% of home value annually for taxes and insurance.
Q3: How does credit score affect affordability?
A: Higher credit scores typically qualify for lower interest rates, increasing your affordable loan amount.
Q4: What's the difference between pre-qualification and pre-approval?
A: Pre-qualification is an estimate, while pre-approval involves verification of your financial information.
Q5: How much down payment should I consider?
A: While this calculator shows loan amount, remember to account for down payment (typically 5-20%) when determining home price range.