One of the more stressful things about applying for a mortgage is the possibility of being turned down -- being judged and not making the cut. The less you know about mortgages and how underwriters evaluate you, the more sleep you are likely to lose during the home buying process. However, you can reduce your anxiety by using a mortgage approval calculator in the privacy of your own home -- playing around with this online tool until you come up with a workable purchase price and loan amount.
LendingTree's tool is called a Home Affordability Calculator, and it offers some pretty unique features that many sites don't have. Other tools are widely available online and have names like mortgage pre-qualification calculator, mortgage pre-approval calculator, or pre-approval calculator. (In reality, there is no such thing as a mortgage pre-approval calculator; pre-approval involves submitting a full application package and being evaluated by an underwriter.)
Prequalify with a Mortgage Approval Calculator
More accurately, these calculators are really mortgage pre-qualification calculators. Pre-qualification generally involves taking information from the applicant without necessarily verifying its accuracy or running a credit check. It's just the first step. Pre-approval means actually applying for a mortgage, getting your credit checked, documenting your income and assets and being evaluated by an underwriter.
To use the LendingTree calculator (or any other pre-qualification tool), you need to know what your before tax income is and what your monthly bills are. Unlike many calculators which want you to determine your monthly income, LendingTree's allows you to use an annual figure -- you can pull it right off of your W-2s or tax returns.
If you receive overtime, bonuses or commissions, lenders prefer to see that you've been getting it for at least two years and that the amount is stable or increasing. You may be able to count this income if you've been getting it for at least one year if it's stable or increasing and if it appears likely to continue. For other kinds of income, from alimony to pensions to trust funds -- you need to prove that you'll be getting it for at least another three years.
If you're self-employed, it gets more complicated. Many people make the mistake of counting their gross revenue (before expenses) instead of their net income when they calculate their maximum loan amount -- that could really overstate what they qualify to borrow. In general, your self-employment income for mortgage qualifying purposes equals your taxable income plus depreciation -- not your gross receipts.
Next, you'll input your total monthly debts. These include things like auto loan payments, credit card minimum payments (even if you pay more), student loan payments and other monthly accounts. They do not include basic living expenses like utilities, commuting costs or food. Don't count debts that are deducted on your taxes if you're self-employed -- they've already been subtracted from your income.
Your down payment affects the amount you qualify to borrow, and bigger down payments mean higher loan limits. You'll have closing costs as well, so don't plan on completely emptying your bank account for your down payment. If you put less than 20 percent down, you'll probably have to pay mortgage insurance -- either through a private company or a government agency like FHA. You can choose to include mortgage insurance in the calculations by clicking the "Assumptions" tab and selecting that option. In this tab, you can also input the estimated property taxes and insurance for your new home.
Assessing Your Risk
LendingTree's calculator provides three loan results for conservative, moderate and aggressive scenarios. The more conservative your scenario, the greater your chances of being approved. In general, you can be more aggressive if your income is very reliable, your credit is beyond reproach and you have enough savings to cover several months of house payments if your income stops. If your profile is less-than-perfect, you should probably buy a cheaper house and play it safe.