Calculating Mortgage Affordability

The affordability of mortgage financing plays an important role in a buyer's home search. Moreover, mortgage policies are different now than ever before: while interest rates are lower for accredited borrowers, those with questionable credit face higher rates and more buyers today aren't able to qualify at all. Jack Guttentag, in an article in The Columbus Dispatch, argues that, "mortgage addordability must be calculated three times using three rules...the income rule, the debt rule, and the cash rule. The final affordability figure is the lowest." By coming to three separate conclusions using three different models, home buyers are able to play it safe by assuming they cannot finance more than the lowest figure generated by the three tests.

The income rule: the borrower's monthly housing expenses (the mortgage payment, property taxes, and homeowner insurance premium) cannot exceed a percentage of the borrower's income specified by the lender. To afford more, obtain an additional source of income.

The debt rule: the borrower's total housing expense (the sum of the monthly housing expense plus monthly payments on existing debt) cannot exceed a percentage of the borrower's income specified by the lender. To afford more, repay debt.

The cash rule: the borrower must have sufficient cash to meet the down paymwnt requirement plus additional settlement expenses. To afford more, reduce the down payment and settlement costs, or gain access to an additional source of cash.

Use Guttentag's affordability calculator to see how much you can afford.