Most new home buyers are caught in a weird spot when they decide to buy a home. They want to know what kind of houses they could buy, but need to know, “How much mortgage can I qualify for?” Fortunately, there’s an easy way to get a ballpark figure so you can start looking around online for homes in your area.
Home buying calculators
Mortgage calculators can give you a starting point when launching your home search. However, not all mortgage calculators are created equal.
You want to find one that factors in your total home payment — not just the principal and interest. It should include taxes, homeowners insurance, and HOA dues. That’s how the lender will look at your payment, and so should you.
Loan calculators aren’t perfect, though. That’s because you don’t always know exact numbers the lender will come up with for income and debts. For instance, if you’re self-employed, the lender will only consider your income after write-offs. Side gigs, bonus income, overtime — they may not be counted toward qualifying income, depending on history.
That’s why, if you’re serious about home buying, it’s best to talk to a lender and see how they calculate your debts and income. With a pre-approval from a lender, you can be confident as you start looking for homes.
What is DTI?
DTI is an acronym you may hear a lot as you get qualified for your home. It means “debt-to-income ratio” and it’s a comparison between your qualifying income and monthly debt payments.
- $7,000 per month salary, pre-tax
- Debt payments
- $1,000 per month payments for student loans, car loans, and credit card minimum payments
- $2,000 future home payment including principal, interest, homeowners insurance, and taxes
You would have a DTI of 43% ($3,000 / $7,000).
Typically, the maximum DTI to qualify is around 45% if you have good credit.
Talking to a lender is best if you plan to shop for homes soon
It would be really disappointing to calculate your maximum mortgage only to discover that you can’t actually qualify for that amount.
There are many variables that can be hard to determine, like credit score, variable income, or debt payments.
If you plan to look at homes soon, talk to a lender and get a pre-approval letter. That piece of paper will tell you the exact amount of mortgage and home price you qualify for.