Mortgage Calculators Used to Determine Qualifying Income

Before a consumer starts the hunt for the best mortgage or the search for the right home, the starting point has to be determining how much home they can afford.  Using a mortgage calculator to be prequalified allows a borrower to focus on a reasonable price range for a home.  Qualification mortgage calculators are marketed as a tool to determine the size of a loan or the type of loan a potential borrower may qualify for.  These calculators analyze the users’ present monthly debts, monthly income, interest rate, and loan term.  Based on this input, the mortgage calculator can determine the loan amount the user can qualify for based on standard debt to income ratios.

These mortgage calculators can also be used slightly backwards, to find out what level of income you might need to pre-qualify yourself for a particular mortgage amount.

Most mortgage companies base their home loan qualification on both the borrower’s total monthly gross income and their monthly fixed debt payments.  As a rule, the total monthly housing expenses, including monthly mortgage principal and interest payments, property taxes, mortgage insurance and association dues, cannot exceed 28% of total gross monthly income, and total debt expense with the monthly housing expense cannot exceed 36% of total gross monthly income.  The second requirement includes the payment on credit cards, automobiles, personal loans, etc.

The lender can choose to allow you to pay more than 28 percent of your income to meet mortgage payments.  However, the lender must usually find some other factor that compensates for extending the debt ratio guidelines.  Examples might include, exceptionally high credit scores, a large down payment or sizable cash reserves.

Once you have an understanding of the guidelines you can begin to enter your data into the mortgage calculator to see how large of a loan you may qualify for.   Enter your income, the monthly minimum payment on your debts and the amount of cash you can put toward a new home.  You’ll need to choose an interest rate, since the national mortgage rates advertised to get a good idea of the present market and the loan term.  The mortgage calculator will calculate the maximum house you can afford, the size of the loan and an estimated payment, making some basic assumptions about taxes, insurance and closing costs.

Now, simply work the numbers backwards.  Alter the acceptable debt ratios in the mortgage calculator.  These ratios are preset to 28% and 36% but can be increased or decreased.  If you have compensating factors, increase the ratios in the mortgage calculator and see how much you can qualify for.  The user of this mortgage calculator can change the term, the rate, the present monthly payments and the monthly income.  By using all of these variables in the mortgage calculator there is the potential to view almost every possible outcome from debt levels to income levels to see how much of a mortgage loan someone may qualify for.

This entry was posted on Friday, December 12th, 2008 at 12:52 pm and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.