This free online Mortgage Prequalification Calculator will calculate whether or not you would qualify for a home loan, and if so, how much of a home loan you might be qualifying for.
If you would like to see how much house you can afford, versus what size mortgage you can qualify for, please visit the House Affordability Calculator, which includes a forecast of all home ownership costs.
If you've used a mortgage qualifier calculator on another website you have probably seen the two standard benchmarks used to determine how much of a mortgage you qualify for. They are the PITI to income ratio and the debt to income ratio. In case you're not familiar with how these ratios are arrived at, or how they impact your home loan qualification, let's discuss each of them separately.
The PITI to income ratio is one of two common formulas used to determine how much a lender is willing to borrow to a home buyer. PITI stands for Principal, Interest, Tax, and Insurance, which are the four parts that makes up the typical mortgage payment. A fifth part, Private Mortgage Insurance (PMI) may also be included in the PITI figure where it applies (down payment is less than 20% of the home price).
The PITI to income ratio is calculated by dividing the total mortgage payment (PITI and PMI) by your gross monthly income. Since most home lenders only allow a maximum PITI to income ratio of 28% (though some lenders may go as high as 40%), you can determine your maximum PITI mortgage payment by multiplying your gross monthly household income by 28%. So if your gross monthly household income is $4,000, the most your monthly PITI mortgage payment can be is $1,120 (4,000 X .28).
The debt to income ratio is basically the same as PITI to Income ratio, except that it also includes all non-mortgage monthly debt payments. So to calculate your debt to income ratio you would add up all of monthly non-mortgage payments (car payments, credit card payments, loan payments, etc.) and then add that result to your PITI mortgage payment. You then divide your total monthly mortgage and debt payments by your gross monthly household income to arrive at your maximum combined debt and mortgage payment.
Since most prudent home lenders allow a maximum debt to income ratio of 36% (though some money-hungry lenders may go as high as 48%), you can determine your maximum combined debt and mortgage payment by multiplying your gross monthly household income by 36%. So if your gross monthly household income is $4,000, the most your monthly combined debt and mortgage payment can be is $1,440 (4,000 X .36).
Once the home lender has determined your maximum mortgage payment and your maximum combined debt and mortgage payment, they then use an algorithm to determine the maximum home loan amount for each. The lesser of these two loan amounts is then used to determine the maximum home loan you will qualify for. The mortgage prequalification calculator on this page attempts to mirror that qualifying process in its calculations.
A third ratio you should consider while determining the size of a home loan you want to qualify for, is what I call the Financial Freedom Ratio, which is the amount of free time you have relative to the number of hours you are awake.
While there is no formula for calculating your financial freedom ratio, it's important to recognize that the more you spend to own and operate a home, the less discretionary time you will have at your disposal. I know a lot of families who are so busy working to pay for their expensive homes that they have little time to actually enjoy the homes they purchased. Sure, they have a nice house, but they have NO LIFE!
So please remember this when applying for a mortgage: Lending institutions could care less whether or not you have a life outside of working to pay for your home, i.e., your financial freedom ratio. All they care about is whether or not you make your house payments as they come due.
With that, let's use the Mortgage Prequalification Calculator to calculate whether or not you qualify for a home loan, and if so, just how large of a mortgage lending institutions think you can afford.
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Gross annual income: Your gross annual household income. This is the amount before taxes are deducted.
Monthly debt payments: The total of your non-mortgage monthly debt payments. This would include car loans, student loans, credit card payments and so on.
Down payment: The amount you have available for a down payment after paying closing costs.
Annual interest rate: The annual interest rate you expect to pay on this mortgage. You can enter the rate as a percentage (for .0625, enter 6.25%).
Monthly Insurance: The monthly insurance payment you expect to pay. As a rule of thumb, you can expect to pay .125% (home price X .00125) of the purchase price per month.
Annual property tax percentage: The annual property tax percentage you expect to pay. As a rule of thumb, you can expect to pay 1.1% of the purchase price per year.
Mortgage term in number of years: Select the term of the home loan in number of years. As a rule of thumb, the shorter the loan term the lower the home loan you will qualify for.
Maximum mortgage payment to income ratio: Your maximum mortgage payment to income ratio. The mortgage prequalification calculator prefills this field with a default ratio of 28% (in this case your PITI mortgage payment cannot exceed 28% of your monthly income) but you can change this to whatever ratio you see fit.
Maximum debt payments to income ratio: Your maximum mortgage payment plus debt payments to income ratio. The mortgage prequalification calculator prefills this field with a default ratio of 36% (in this case your mortgage payment plus your debt payments cannot exceed 36% of your monthly income) but you can change this to whatever ratio you see fit.
Down payment: This is your original down payment amount as entered in the top of the mortgage prequalification calculator.
Mortgage loan amount: This is the maximum mortgage you would qualify for based on your current entries. The mortgage prequalification calculator starts with maximum loan amount using only principal and interest payment, and then iterates down until all other combined factors (PITI and debt payments) fall within the qualifying ratios.
Home Price: This is the price of the home you could purchase, which is the mortgage amount plus your down payment.
Monthly PMI payment: This is your estimated monthly PMI payment amount.
Monthly insurance payment: This is your estimated monthly insurance payment amount.
Monthly property tax payment: This is your estimated monthly property tax payment amount.
Monthly principal & interest payment: This is your estimated monthly principal and interest payment amount.
Total monthly cash outflow: This is the total of your monthly PMI, property taxes, homeowner insurance, and principal and interest payment.