Maximum Mortgage Calculator

Before you start shopping for a home, it’s important to understand your housing budget. There is nothing worse than falling in love with a property, to find out you’re not eligible for financing.

Unless if you intend to pay cash for your purchase, you’ll need to know exactly how much you can qualify for.

Several factors can determine how much house you can buy, like your debt to income ratio, current interest rates, and your potential housing expenses.

The maximum mortgage calculator compiles these factors to help you find a reasonable price range and to prepare your for the process with a trusted broker or lender.

Your debt to income (DTI) ratio is an important factor to be aware of when you apply for a mortgage.

If your DTI is too high, you’ll have trouble qualifying for a conventional loan. A study done by the Federal Reserve revealed that excessive debt was the leading reason for mortgage denials.

Calculating DTI

Your debt to income (DTI) ratio is all your monthly debts, divided by your monthly income. Creditors use this calculation, plus your credit history, to evaluate whether you will be able to manage your mortgage payments.

A DTI below 20% is very good and signifies low financial stress. By contrast, a DTI above 50% is considered higher risk and can suggest that the borrower may have trouble saying on top of their payments.

Example

A mortgage applicant has a $350 car payment, $150 student loan payment, and a minimum credit card payment of $500. He or she has a gross monthly income of $5,000, resulting in a DTI of 20%.

The home the applicant is interested in would result in a monthly mortgage payment of $1,000, pushing the applicant’s DTI to 40%.

DTI Requirements

Each mortgage lender can have different debt to income requirements.

Fannie Mae (a leading source of financing for mortgage lenders) only accepts conventional loans up to 36% DTI, or 50% DTI if the borrower meets specific credit requirements.

This is important because many creditors sell their conventional mortgage products to Fannie Mae and Freddie Mac to free up working capital.

Credit rating is a critical factor that lenders use to assess an applicant’s eligibility for a mortgage.

A healthy credit score of 720 or higher will typically result in the best interest rate offers.

Conversely, if your credit score is less than 720, you can still qualify, but might not get a favorable rate.

The minimium credit score for a conventional mortgage loan is 620.

To get a conventional mortgage, creditors typically require a 20% down payment. That means the mortgage would come out to eighty percent of the home's appraised value.

If you don't have the savings to pay that much upfront, you could still get a mortgage using a form of private mortgage insurance (PMI).

In most cases, that means an additional monthly premium, which can increase your monthly payments.

Without stable income, a creditor may doubt your ability to repay the mortgage loan. Applicants that have had the same job for two years or more are more likely to get approval than a borrower that changes jobs frequently.

In many cases, a loan underwriter can ask for an employment letter, tax returns, and bank statements to substantiate your income history. Being aware of these requirements ahead of time can save you from a lot of stress and frustration.

With this great tool, you should get an idea of the home you can afford.

But if the house you want exceeds your budget, you may want to pay off high interest credit cards or outstanding loans to reduce your DTI. Alternatively, you may want to consider including a strong co-borrower in your application.

Finally, it might be worth moving into a smaller home, knowing that it's a stepping stone to a better property in the future.