To explain how much a client can afford to borrow in simple terms, you can break it down into a few key points:

1. Income and Debt Ratio (DTI)

- Income vs. Debt: Lenders look at how much you earn versus how much you owe. This is called the debt-to-income ratio (DTI).

- Front-End Ratio: This is the percentage of your income that goes toward your mortgage payment, including principal, interest, taxes, and insurance. Typically, this should be around 28-30% of your gross monthly income.

-Back-End Ratio: This includes all your monthly debt payments (mortgage, car loans, credit cards, etc.). Lenders usually want this to be 36-43% of your income, depending on the lender.

2. Down Payment

- The more you can put down upfront, the less you need to borrow. Most loans require a down payment of 3-20% of the home’s price.

3. Credit Score

- Your credit score plays a big role in the interest rate you’ll get. Higher scores (700+) mean better rates, which can help you afford a higher loan because your monthly payments will be lower.

4. Loan Term and Interest Rates

- The length of the loan (e.g., 30 years) and the interest rate affect your monthly payment. A lower rate or longer term reduces monthly payments, increasing the loan amount you can afford.

Simple Example:

“Imagine you make $5,000 a month. If your mortgage, taxes, and insurance should not exceed 30% of your monthly income, that means your mortgage payment could be around $1,500. From there, we can estimate how much loan you can afford based on your interest rate and loan term.”

Putting it all together:

- Basic formula: Lenders typically approve loans where monthly housing costs (including taxes and insurance) are no more than 28-30% of your gross monthly income, and total monthly debts (including your mortgage) are no more than 36-43% of your income.

- Example calculation: If your income is $5,000/month, you could potentially afford a mortgage payment of up to $1,500 (30% of your income). From there, we can determine what price range of homes you might qualify for, based on the down payment, interest rate, and loan term.

Would this framework be helpful for you to explain to your client?