Mortgage affordability depends on several key factors that determine how much a borrower can afford to pay for a home. Here’s a breakdown of the most important factors:

1. Income

• Lenders evaluate gross annual income (before taxes) to estimate how much a borrower can afford.
• A higher income generally means higher affordability.

2. Debt-to-Income Ratio (DTI)

• This measures the percentage of monthly income that goes toward paying debts.
• Two types of DTI:
  • Front-End DTI (Housing Ratio) – Typically 28% of gross income is allocated for housing costs.
  • Back-End DTI – Includes all debts (mortgage, car loans, student loans, credit cards, etc.), usually capped at 36-43%.

3. Down Payment

• A larger down payment reduces the loan amount, lowering monthly payments and potentially eliminating private mortgage insurance (PMI).
• Conventional loans typically require 5-20%, while FHA loans allow as low as 3.5%.

4. Interest Rate

• A lower mortgage interest rate reduces the monthly payment, making a larger loan more affordable.
• Interest rates depend on credit score, loan type, and market conditions.

5. Loan Term

• Common terms are 15, 20, or 30 years.
• Shorter loan terms mean higher monthly payments but less total interest paid.

6. Property Taxes & Insurance

• Lenders include property taxes and homeowners insurance in the mortgage payment (PITI).
• Higher taxes and insurance reduce affordability.

7. Credit Score

• A higher credit score qualifies borrowers for lower interest rates, increasing affordability.
• Scores above 740 typically get the best rates.

8. Other Expenses

• HOA fees, maintenance, and utilities also impact affordability.
• Lenders don’t factor these in directly but should be considered by buyers.