Mortgage guides
Chapter 2: How to calculate your monthly principal-and-interest payment budget | For curious minds
Sources and calculations checked:
Use monthly income, housing and debt limits, and housing costs to estimate your monthly principal-and-interest payment budget.
Terminology guide: check the meanings used in these articles
In chapter one, we calculated a monthly principal-and-interest payment from a loan amount. This chapter asks: from an underwriter’s perspective, how much money is allowed each month to pay principal and interest?
Just want the takeaway?
Your monthly principal-and-interest payment budget depends on your income, existing debt payments, housing costs, and the income-percentage limits used in the estimate.
The formulas below explain how to calculate that budget. For a more accurate estimate based on your situation, talk to me about your budget. We can review your income, monthly obligations, and loan options together. You do not need to follow the math below to get started.
Calculation assumptions and symbols
This model applies both a housing expense ratio limit and a debt expense ratio limit. The applicable limits and underwriting methods depend on the program; neither ratio is assigned a numerical value here.
| Symbol | Meaning |
|---|---|
| I | Gross monthly income |
| h | Housing expense ratio limit, written as a decimal |
| d | Debt expense ratio limit, written as a decimal |
| D | Other required monthly debt payments |
| C | Monthly property taxes, homeowners insurance, applicable HOA fees and mortgage insurance |
| H | Total monthly housing expense ceiling |
| M | Monthly principal-and-interest payment budget |
Total monthly housing expenses include principal and interest plus C. The debt expense ratio includes housing expenses and other monthly debt payments.
Step 1: Apply the housing expense ratio
Step 2: Apply the debt expense ratio and subtract other debts
Step 3: Take the smaller housing expense ceiling
Step 4: Subtract other housing costs
When M is positive, it is the principal-and-interest budget to use in chapter three. This is a simplified model, not a universal approval rule. Fannie Mae’s debt-ratio guidance and housing expense guidance describe its program requirements.
Next: Chapter 3 — How your monthly principal-and-interest payment budget determines your loan amount