Mortgage Pre-Approval Calculator 2021CASAPLORERTrusted and Transparent
Our mortgage pre-approval calculator estimates the loan amount you may be eligible for through a lender. This is similar to a mortgage pre-qualification where a lender takes a basic look at your financials and provides an estimate. The calculator works the same way, where it requires simple financial inputs such as income and debt to estimate a mortgage amount that you could qualify for in the pre-approval process.
What is mortgage pre-approval?
Mortgage pre-approval is the process of the lender providing you a loan estimate based on your financials. It is a formal process where you have to submit a host of documents linked to your income, debt, and assets to the lender.
The lender uses this information to provide an amount that they would feel comfortable lending to you for your home. Pre-approval can be used as a bargaining chip in a seller’s market as it shows sellers that you have financing that has been approved by a lender. Mortgage pre-approvals are valid for 60 to 90 days based on the lender.
What is mortgage pre-qualification?
Mortgage pre-qualification is a step that takes place prior to mortgage pre-approval. The lender provides an estimate; however, no documents need to be submitted and it is not a formal approval that the financing will be available. Our calculator can also provide an estimate giving you an idea of what to expect when you do meet the lender.
How does the calculator work?
The calculator determines what amount you can qualify for by analyzing your debt-to-income (DTI) ratio. The DTI ratio is a financial metric used by lenders to assess the ability of the borrower to manage their debt. It is calculated by dividing your monthly debt expenses by your gross monthly income. For example, if your monthly debt is $1,500 and your gross monthly income is $4,500, then your DTI ratio is 33% ($1,500/$4,500).
The DTI ratio plays a very important role in determining your home affordability. Our calculator uses a DTI ratio of 36% as the ideal amount that you will be eligible for in your mortgage. This follows the 28/36 rule where no more than 36% of your monthly income is going towards housing expenses and debt repayments.
However, different mortgage programs have different requirements, as some lenders are comfortable with providing a mortgage to borrowers with a DTI ratio as high as 43%. Our calculator also provides this value to show you how much you could be eligible for with certain lenders.
How to get pre-approved for a larger loan amount?
If you feel the amount that the calculator shows are too low, then there are 3 things you can try to do to increase your loan amount:
- Improve Credit Score: Your credit score plays an important role in any mortgage program and can determine how much you can borrow and your mortgage rate. There are different ways in improving your credit score, such as correcting any errors or wrong payments on your credit cards, not using the full credit limit each month, and paying bills as soon as possible and within the allotted time.
- Reduce Debt: If you have a lot of debt, this will likely reduce how much you can afford for a house. Therefore, you should try to reduce your monthly debt using either of the two strategies, the snowball or avalanche method. In the snowball method, you focus on amounts, where you pay off the smallest debt and then move on to larger debt, whereas, the avalanche method is more focused on the interest rate, you pay off the debt with the highest interest rate and then move on to the debt with lower interest rates. Paying off existing debt will allow you to borrow more money on a mortgage.
- Increase Income: Although difficult to do, it is a big factor affecting the loan amount you will be approved for your mortgage. If possible, hold off the home purchase till your next salary increase or wait for the bonus period where your savings will increase. You can also try to supplement your income with a side hustle or investments.
- Co-signer: If you have a family member, relative, or friend who has a higher income and credit score than you, they can be added as co-signers on your mortgage. A co-signer can improve your chances of getting a larger loan amount as the co-signer’s income is also added to your application and they are liable to pay if you default on your monthly mortgage payment.
How long does it take to get pre-qualified and pre-approved?
Mortgage pre-qualification is an informal process that requires basic details, therefore, lenders can provide a non-binding estimate within a day or two. It can happen in-person, online, or even over the phone.
Pre-approval on the other hand requires a deep dive into your finances and is binding, hence, it can take up to several business days depending on the lender.