David is a Chartered Financial Analyst and former senior credit analyst, specializing in consumer credit metrics and mortgage underwriting standards.
This 4-in-1 Loan Affordability calculator helps you find what you can safely borrow. Enter any three values—Gross Monthly Income, Existing Monthly Debt, Target DTI Ratio, or New Loan Payment—and we will solve for the fourth.
Loan Affordability Calculator
Loan Affordability Formulas
L = (I * (R / 100)) – D
Solve for Income (I):
I = (D + L) / (R / 100)
Solve for Existing Debt (D):
D = (I * (R / 100)) – L
Solve for DTI Ratio (R):
R = ((D + L) / I) * 100
Formula Variables
- (I) Gross Monthly Income: Your total income before any taxes or deductions.
- (D) Existing Monthly Debt: The sum of all *other* monthly debts (e.g., car loan, student loan, credit cards). *Do not include* the new loan payment you are solving for.
- (L) New Loan Payment: The affordable monthly payment for the new loan you are considering (e.g., a new mortgage).
- (R) Target DTI Ratio: The maximum Debt-to-Income ratio you (or your lender) are willing to have *after* taking on the new loan.
Related Calculators
- Debt to Income (DTI) Calculator
- Mortgage Payment Calculator
- Loan to Value (LTV) Calculator
- Simple Interest Calculator
What is Loan Affordability?
Loan affordability is the measure of how much new debt you can safely take on without jeopardizing your financial stability. For lenders, it’s a critical risk assessment. For you, it’s the key to responsible borrowing and avoiding becoming “house poor” or “car poor.”
The primary tool for measuring affordability is the **Debt-to-Income (DTI) ratio**. This ratio compares your total monthly debt payments (including the proposed new loan) to your gross monthly income. Lenders have strict DTI limits. For example, a lender might approve a mortgage only if your total DTI (all debts + new mortgage) remains at or below 43%.
This calculator helps you work backward from that limit. By setting a “Target DTI Ratio,” you can see exactly what new monthly loan payment (L) your income (I) can support, given your existing debts (D). This gives you a realistic budget *before* you start shopping for a loan.
How to Calculate Affordability (Example)
-
Find Gross Monthly Income (I)
You have a salary of $72,000 per year.
• Gross Monthly Income (I): $72,000 / 12 = $6,000 -
Sum Existing Monthly Debt (D)
Sum all debts *except* the new loan:
• Car Loan: $300
• Student Loan: $200
• Credit Card Minimums: $100
• Existing Monthly Debt (D): $600 -
Set a Target DTI Ratio (R)
You are applying for a mortgage and the lender has a maximum DTI limit of 43%. To be safe, you set your personal target at 40%.
• Target DTI Ratio (R): 40% -
Choose the Affordability Formula
Use the formula to solve for the New Loan Payment (L):
L = (I * (R / 100)) – D -
Calculate the Affordable Payment
First, find your total “debt allowance”:
Allowance = $6,000 * (40 / 100) = $2,400
Now, subtract your existing debt:
L = $2,400 – $600 = $1,800
Your maximum affordable new monthly payment is $1,800.
Frequently Asked Questions (FAQ)
What DTI Ratio (R) should I use?
For a conservative personal budget, 36% is a great target. For a Qualified Mortgage, lenders often cap at 43%. Some FHA loans may go up to 50%, but this is very high risk. Using 36% will give you a much safer affordability estimate.
Why use Gross Income (I) instead of take-home pay?
Lenders are required by law to use your Gross Monthly Income for official DTI calculations. While it’s smart to create your *personal* budget based on take-home pay, this calculator uses Gross Income to align with the official lending standards, showing you what a bank will likely approve.
How can I use this to find the required income for a loan?
Enter your Existing Debt (D) (e.g., $500), the New Loan Payment (L) for the loan you want (e.g., $1,500), and your Target DTI (R) (e.g., 40%). The calculator will solve for the Gross Monthly Income (I) you would need to afford that loan.
What is included in Existing Debt (D)?
Include all minimum payments that appear on your credit report. This includes car loans, student loans, personal loans, and the minimum monthly payments for all your credit cards (even if you pay them in full each month).