Calculating Housing Affordability

By Corrie Forcet, Realtor® of The Forcet Group | KW Suburban Tampa

“For the seventh week in a row, mortgage rates continued to climb toward eight percent, resulting in the longest consecutive rise since the Spring of 2022. Rates have risen two full percentage points in 2023 alone.” - Freddie Mac Oct 2023

Dreaming of a home purchase but wondering how the increase in interest rates could affect how much house you can really afford? In this newsletter, we'll break down the math behind this crucial calculation. We'll use an example of a Tampa household to illustrate the process.

Meet the Smiths, our sample Tampa household. The Smiths have the following financial details:

Annual Income: $100,000

Credit Score: 680

Monthly Debt Payments: $1,200

Typical Interest Rate: 7%

Down Payment: $35,000

Calculating Your Debt-to-Income Ratio (DTI)

One of the key factors lenders consider when determining how much they'll lend you is your Debt-to-Income Ratio (DTI). This ratio is calculated by dividing your monthly debt payments by your monthly gross income. Let's assess the Smith’s monthly income capabilities. 

Monthly Gross Income: $100,000 / 12 = $8,333.33

Your DTI ratio should be no more than 43% to 50%, depending on the type of loan. This means that your monthly mortgage payment plus other debt payments should not exceed 43-50% of your monthly income. 

For the Smiths:

Conventional Loan: $8,333.33 x .43% = $3583.33 

FHA/VA: $8,333.33 x .50% = $4,166.66

Calculating the Maximum Monthly Mortgage Allowance

To calculate the maximum monthly mortgage payment, you can use the following formula:

Maximum Monthly Mortgage Payment = (Monthly Gross Income x Allowable DTI) - Monthly Debt Payments

For the Smiths:

Conventional Loan Maximum Monthly Mortgage Payment = $3583.33 - $1,200 = $2,383.33 

FHA/VA Loan Maximum Monthly Mortgage Payment = $4,166.66 - $1,200 = $2,966.66

Determining the Affordable Home Price

Now, let's use this maximum monthly mortgage payment to calculate the home price this Tampa household can afford. We'll have the Smiths put 10% down and finance with a typical interest rate of 7% under a standard 30-year mortgage term.

Using a basic mortgage calculator and factoring variables such as PMI, taxes and insurance, a monthly mortgage of $2,966 will amount to a home price of around $358,421.05

Remember, this is a rough estimate, and you should consult with a mortgage expert and a real estate agent to get a precise figure based on current interest rates and other unique factors surrounding your personal finances. Homeownership is very attainable despite interest rates growing and home prices maintaining. And with the prospect of refinancing in the future, the right time to buy a home is when you can afford to buy a home. I am just a phone call away - reach out and let’s talk details. 

Stay tuned for more tips on navigating the Tampa real estate market!