Maximum mortgage affordability = your gross monthly income minus debts, applied against lender qualification ratios.

Most lenders use **28/36 rule**: housing costs ≤28% of gross income, total debts ≤36%.

In 2025, conventional loans allow up to 50% DTI with strong credit (740+).

**Basic affordability formula**:.

Max Monthly Payment = (Gross Monthly Income × 0.28) - Property Tax - Insurance - HOA.

Max Loan Amount = Max Monthly Payment ÷ Monthly Payment Factor (based on rate & term).

**Example 1** (Single borrower, $80,000/year income): - Gross monthly income: $80,000 ÷ 12 = $6,667 - Max housing payment (28%): $6,667 × 0.28 = $1,867/month - Estimated property tax + insurance: $400/month - Available for mortgage payment: $1,867 - $400 = $1,467/month - At 7% interest, 30-year: $1,467 ÷ $6.65 per $1,000 = **$220,600 max loan** - With 10% down: **$245,000 max home price**.

**Example 2** (Dual income, $150,000/year combined): - Gross monthly income: $150,000 ÷ 12 = $12,500 - Max housing payment (28%): $12,500 × 0.28 = $3,500/month - Estimated property tax + insurance: $700/month - Available for mortgage payment: $3,500 - $700 = $2,800/month - At 7% interest, 30-year: $2,800 ÷ $6.65 = **$421,000 max loan** - With 20% down: **$526,000 max home price**.

**28/36 rule breakdown**:.

**Front-end ratio** (housing only, max 28%): - Mortgage principal + interest - Property taxes - Homeowners insurance - HOA fees - PMI (if <20% down).

**Back-end ratio** (all debts, max 36%): - All front-end housing costs - Car loans/leases - Student loans - Credit card minimum payments - Personal loans - Child support/alimony.

**DTI limits by loan type** (2025):.

| Loan Type | Max DTI | Income Requirement | |-----------|---------|--------------------| | Conventional (Fannie/Freddie) | 50% | Good credit (680+) | | FHA | 43-50% | 580+ credit score | | VA | No strict limit | Residual income test | | USDA | 41-43% | Rural property | | Jumbo | 43-45% | Excellent credit (740+), reserves |.

**Income calculation methods**:.

**Debt considerations that reduce max mortgage**:.

**Example 3** (Income $100k, existing debts): - Gross monthly income: $8,333 - Max back-end DTI (36%): $8,333 × 0.36 = $3,000 total debt payments - Existing debts: - Car loan: $450/month - Student loan: $300/month - Credit card minimums: $150/month - Total existing debt: $900/month - **Available for housing**: $3,000 - $900 = $2,100/month - At 7%, 30-year: $2,100 ÷ $6.65 = **$315,800 max loan** (reduced by existing debt).

**Down payment impact on max purchase**:.

| Down Payment | Max Loan | Max Home Price | PMI? | |--------------|----------|----------------|------| | 3.5% (FHA) | $300,000 | $310,880 | Yes | | 5% | $300,000 | $315,789 | Yes | | 10% | $300,000 | $333,333 | Yes | | 20% | $300,000 | $375,000 | No |.

**Credit score impact on affordability**:.

Lower credit = higher rate = lower max loan with same payment.

**Example**: $2,000/month payment budget - 760+ credit (6.5% rate): $2,000 ÷ $6.32 = $316,500 max loan - 680 credit (7.0% rate): $2,000 ÷ $6.65 = $300,750 max loan - 620 credit (7.5% rate): $2,000 ÷ $6.99 = $286,100 max loan - **Difference**: $30,400 less buying power with 620 vs 760 score.

**Conservative vs aggressive affordability**:.

**Conservative** (28% front, 36% back): - Lower financial stress - Room for emergencies, savings - Recommended for first-time buyers, variable income.

**Aggressive** (up to 50% DTI): - Higher approval amount - Tight monthly budget - Risk: job loss, rate increases (ARM), unexpected expenses.

**2025 affordability strategies to maximize home price**:.

Lenders determine max mortgage using **5 key factors**: (1) Income & DTI ratio (28/36 or up to 50%), (2) Credit score (620 minimum, 740+ best rates), (3) Down payment (3.5-20%), (4) Existing debts, (5) Employment history (2+ years stable).

In 2025, automated underwriting (DU/LP) analyzes all factors to approve max loan amount.

**Factor 1: Income & Debt-to-Income (DTI) Ratio**.

**How lenders calculate DTI**: DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100.

Total debts include: - Proposed mortgage PITI (principal, interest, taxes, insurance) - Car loans/leases - Student loans (even if deferred) - Credit card minimum payments - Personal loans - Child support/alimony.

**DTI approval thresholds** (2025): - <36%: Excellent, qualify for best rates - 36-43%: Good, standard approval - 43-50%: Acceptable with compensating factors (high credit, reserves) - >50%: Difficult, may require manual underwriting or non-QM loans.

**Example**: $100k income, $2,500 proposed mortgage, $800 other debts - DTI = ($2,500 + $800) ÷ $8,333 = 39.6% (approved).

**Factor 2: Credit Score Impact**.

**Minimum scores by loan type**: - Conventional: 620 (620-679 = higher rate + larger down payment) - FHA: 580 with 3.5% down, 500-579 with 10% down - VA: No official minimum (lenders typically require 580+) - USDA: 640 preferred - Jumbo: 700-740 minimum.

**Rate impact** (2025 example, $400k loan): - 760+ score: 6.75% = $2,594/month - 700-759: 7.00% = $2,661/month (+$67/month = $24,120 over 30 years) - 660-699: 7.25% = $2,728/month (+$134/month = $48,240 over 30 years) - 620-659: 7.75% = $2,862/month (+$268/month = $96,480 over 30 years).

**Max loan reduction from lower score**: With same $2,600 monthly budget: - 760 score (6.75%): $400,000 max loan - 660 score (7.25%): $380,000 max loan (**$20k less buying power**).

**Factor 3: Down Payment Requirements**.

**Minimum down payment** (2025): - Conventional: 3% for first-time buyers, 5% for repeat buyers - FHA: 3.5% - VA: 0% for eligible veterans - USDA: 0% for rural properties - Jumbo: 10-20%.

**LTV (Loan-to-Value) limits**: LTV = Loan Amount ÷ Home Value.

Max LTV: - Conventional: 97% (3% down) - FHA: 96.5% (3.5% down) - VA/USDA: 100% (0% down) - Jumbo: 80-90%.

**Example**: $400k home, 5% down ($20k) - Loan amount: $380,000 - LTV: $380k ÷ $400k = 95% - PMI required (until 80% LTV).

**Factor 4: Existing Debt Impact**.

**How debts reduce max mortgage**:.

Every $100/month in existing debt = ~$15,000 less mortgage approval.

**Example**: $120k income, 36% max DTI - Max total debt: $3,600/month - Scenario A (no debt): $3,600 available for housing = $540k max loan - Scenario B ($800 car + student loans): $2,800 for housing = $420k max loan - **Difference**: $120k less buying power.

**Debt types that count**: ✅ Installment loans (auto, student, personal) ✅ Revolving credit (minimum payment, even if $0 balance) ✅ Alimony/child support (court-ordered) ✅ Other mortgages (rental properties).

**Debts lenders ignore**: ❌ Utilities, phone, insurance (not credit accounts) ❌ Federal student loans in forbearance (some exceptions) ❌ Paid-off debts (closed accounts).

**Factor 5: Employment & Income Stability**.

**Lender requirements**: - **W-2 employees**: 2 years same employer or field (1 year acceptable with strong credit) - **Self-employed**: 2 years tax returns, income trending stable or increasing - **Commission/bonus**: 2-year average, current employer verification - **Job gaps**: Explain gaps >30 days (school, maternity = acceptable).

**Income documentation**: - W-2: Last 2 years + recent paystubs - Self-employed: 2 years personal + business tax returns, YTD P&L - Rental income: Lease agreement, 2 years tax returns (Schedule E).

**Red flags that reduce max approval**: - Job change in last 6 months (especially different field) - Declining income (2024 < 2023) - High percentage of overtime/bonus (lender may discount) - Gaps in employment.

**Compensating factors that increase max loan**:.

**Automated underwriting** (DU/LP systems): Fannie Mae Desktop Underwriter (DU) and Freddie Mac Loan Product Advisor (LP) analyze all factors simultaneously: - May approve 50% DTI with 780 credit + 20% down - May deny 38% DTI with 640 credit + 3% down - Provides instant "approve/refer/caution" decision.

**2025 max mortgage approval limits**: - **Conforming loan**: $806,500 (most U.S. counties) - **High-cost areas**: Up to $1,209,750 (CA, NY, DC, HI) - **Jumbo loans**: >conforming limits, stricter requirements.

**Example approval scenarios** (2025):.

**Scenario A** (Strong approval): - Income: $150k - Credit: 780 - Down: 20% - DTI: 38% - **Max loan**: $650,000 (43% DTI approved due to compensating factors).

**Scenario B** (Marginal approval): - Income: $80k - Credit: 670 - Down: 5% - DTI: 48% - **Max loan**: $280,000 (limited by DTI + credit, may require rate buydown).

**Scenario C** (Denied): - Income: $60k - Credit: 610 - Down: 3% - DTI: 52% - **Result**: Denied or non-QM loan required (higher rate).