Mortgage Pre-Approval Calculator 2022
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.
|Is your credit score greater than 620?||NoYes|
|Are you saving for a down payment?||NoYes|
|Have you been employed for the past 2 years as a full-time employee?||NoYes|
|Have you been bankrupt in the past 4 years or foreclosed in the last 7 years?||NoYes|
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 Mortgage Pre-approval 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.
This calculator has 4 main inputs that are required to estimate how much a borrower may expect to be pre-approved for. In addition to that, to accurately assess the eligibility of a borrower for pre-approval, the calculator also includes four qualification questions that are used by most lenders. The following list describes each input needed to estimate the amount an individual can be pre-approved for.
- Annual Gross Household Income
This input refers to the income before taxes of a household if they are buying a house as co-signers. If only one individual is buying a house, then the individual income should be provided. The income stated should be before taxes or any other expenses such as debt expenses.
- Monthly Debt Expenses
This input requires a borrower to estimate how much they have to pay monthly to service their existing debt. It may include a car loan, student loan, personal loan, and others. This input can be expanded and broken down into loan categories for convenience.
- Length of Loan
Depending on the length of the loan, the amount a lender may be willing to lend will vary. Since the pre-approval letter largely depends on the DTI ratio, the monthly payment is the most important metric for the lender. Monthly mortgage payments plus any other debt cannot exceed 43%. The maximum loan amount is calculated based on the principal. For example, if a borrower earns $100,000 per year and has no debt, then they might be pre-approved for a 30-year loan of $797,916 assuming an interest rate of 3.5%. On the other hand, if the borrower wants a 15-year loan, then they may be pre-approved for a maximum loan amount of $501,201. In both cases, the monthly mortgage payment is $3,583, which makes the DTI ratio of the borrower equal to 43%.
- Interest Rate
This input refers to the annualized interest rate (APR) that needs to be paid over the lifetime of the loan. The interest rate may change over the lifetime of the loan, and it varies depending on the individual borrower’s risk assessment. The best way to estimate the interest rate is to input the current mortgage rate because it is nearly impossible to predict the long-term movements of the interest rates. The interest rate will affect the amount of interest a borrower has to pay monthly, which means that the higher the rate, the lower the loan amount a borrower can be pre-approved for.
How Much Can I Get Pre-approved For?
The amount a lender can pre-approve you for depends on multiple factors such as your income, your current DTI ratio, loan term, and interest rate. In addition to that, a lender will consider your pre-approval only in the case if:
- Your credit score is above 620,
- You have money for the down payment,
- You have proof of stable employment history,
- You have not declared bankruptcy or foreclosed on your home within the last 4 and 7 years respectively.
Another condition that should be satisfied is that your monthly debt payments should not exceed 43% of your monthly gross income. If all the mentioned requirements are met, the lender can do the following calculations to determine how much they can pre-approve you.
First, they need to calculate how much you can add to your monthly debt payments to keep your DTI ratio under 43%. Your DTI equals monthly debt payments divided by monthly gross income. Using this simple formula, the lender can calculate your maximum monthly debt payments as follows:
When the lender knows the maximum monthly debt payments you can make while keeping your DTI at 43%, the lender needs to subtract your current monthly debt payments to find your monthly mortgage payments.
The monthly mortgage payments found are the maximum fixed monthly payments on a loan a lender can pre-approve you for. Based on this number, the lender can calculate the loan value they can provide using the following formula.
Using the steps outlined above, you can calculate how much you may be pre-approved for. If you are looking to estimate how much you need to earn to be pre-approved for a specific mortgage amount, the following section discusses how much you need to earn to be pre-approved for various mortgage loans.
What Income Do I Need for a Mortgage?
This section provides you with the tables of sets of annual gross incomes needed to get pre-approved for a specific mortgage amount at a certain interest rate and loan term. The following metrics are only estimations, and they do not guarantee that a lender will pre-approve you for a certain amount. The tables assume that you do not have any other debt payments and that your DTI ratio will be equal to 43% after the origination of the loan.
Annual Gross Income Needed for
Annual Gross Income Needed for
|Term Length||Interest Rate|
Pre-approval Letters for FHA, VA and USDA Loans
A pre-approval process for FHA, VA and USDA loans are quite straightforward and generally is similar to the pre-approval process for a conventional loan. There are some differences between them that arise due to specific requirements the three loans have. These specific requirements must be met to qualify for the pre-approval.
FHA loans have certain restrictions on the amount a single person can borrow. The loan limit for an FHA loan varies between $420,680 and $970,800. This means that the pre-approval loan limit will also include the number that is consistent with the limits set for a chosen county. Even if a qualifying person earns enough to qualify for a $1,000,000 mortgage, they will never get pre-approved for that amount simply because the limit for FHA loans is lower than that. In addition to that, the minimum credit score required for FHA loans is 500, so even if a borrower has a credit score of less than 620, they may still get pre-approved as long as their score is more than 500. A borrower can receive an FHA loan after 2 years of the most recent bankruptcy. This means that a borrower can get pre-approved for an FHA loan as long as they did not have any bankruptcies within the last 2 years.
VA loans are very specific to a single demographic. These loans are open to eligible veterans and servicemen, which means that a person who is not a veteran or a serviceman will not be able to get pre-approved for a VA loan. In addition to that, VA loans do not have a minimum down payment and credit score requirements. This means that a qualifying borrower does not have to show proof of sufficient funds or credit score to get pre-approved.
USDA loans are open to people who are looking to buy a house in a rural area of the US. This is an important note because even if a person gets pre-approved, they will not be able to use the pre-approval letter for a house that is located in an ineligible area. Similarly to VA loans, USDA loans do not have a down payment or a fixed credit score requirement. This means that a borrower does not have to have money saved up to be pre-approved. On the other hand, even though there is no credit score requirement, some banks may not pre-approve a person who has a bad credit history. It might be difficult to get pre-approved for a USDA loan to buy a house with bad credit history.
The pre-approval process is very similar for any type of mortgage loan. A lender must ensure that a borrower meets eligibility requirements for an inquired loan. If a borrower is eligible, then the lender may calculate the pre-approval amount using the same steps as a conventional loan pre-approval process uses. In some cases, if the pre-approval amount is larger than the mortgage limit, then the borrower may be pre-approved for the mortgage limit.
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.