Sathi Roy (a non-commissioned Mortgage Expert at Better Mortgage) explains how home affordability calculators work – and an even better way to figure out how much you can borrow.
Affordability calculators are a tricky thing.
When someone asks, “How much house can I afford?” what they really need to know is, “How much can I actually get financing for?” Unfortunately, online mortgage calculators are pretty bad at giving a reliable answer. Most home buyers often end up qualifying for less (or at least a different amount) than what their calculator told them.
Why most home affordability calculators aren’t completely reliable
It isn’t the calculator’s fault that it’s not accurate. The problem is that not all calculators are created equal. This is because most of them work with only a partial or minimal amount of data and inputs based on ballpark estimates for income, debt, down payment, and credit scores.
Calculators don’t know this information isn’t entirely accurate, nor how likely it is that you will receive a full loan approval. And, while some calculators do perform a “soft” credit inquiry (which has no effect on your credit score) to get an idea of your loan eligibility, their initial feedback must still be verified with a full loan application, credit review, and approval.
Here’s a comparison of what information is reviewed when it comes to calculators, basic pre-approvals, and verified pre-approvals:
Now that you know the differences between the three, you can understand why the calculator is a great place to start, but the next best step is to secure a loan pre-approval — and even better a verified pre-approval — and here’s why.
A pre-approval provides a better idea of how much house you can afford
When you’re ready to start home shopping, rather than rely on a mortgage affordability calculator, consider obtaining a loan pre-approval with a qualified lender.
A pre-approval letter can provide a more accurate idea of the maximum loan amount you can borrow. And, because you may need to submit financial documentation before receiving a letter, you’ll have a more realistic idea of if you’ll be approved for a mortgage down the road.
But basic pre-approvals are still not a full guarantee. That’s why it pays to consider a fully verified pre-approval, which goes a step further to confirm your financial documents, giving you complete confidence in exactly how much you can afford. Verified pre-approval is particularly important if your income or situation is not straightforward.
A verified pre-approval is especially beneficial to certain borrowers
Self-employed or non-conventional income borrowers
If you are a self-employed borrower or someone with non-conventional income streams a pre-approval will provide a much more realistic picture of what you can afford.
This is because home affordability calculators are based off the estimated net income you input, without true verification. But, with a pre-approval, your lender will verify your income and asset documents, which provides a better indication of what your purchasing power will be.
Borrowers looking at new construction homes
If you are interested in purchasing a newly built home, a builder is not likely to begin building until you can guarantee loan approval — and a home affordability calculator won’t do. This is because builders know they won’t get paid until the house is built, and if you can’t get approved for your loan, then they won’t be paid at all. The verified pre-approval gives the builder peace of mind that you will, in fact, get the financing you need once your home is complete.
If your closing date is more than 75 days away (which is typical when you’re building a new home), you can only receive a verified pre-approval. But once closing is within 75 days, can you obtain a Loan Estimate and begin the underwriting process to secure the loan.
Borrowers competing with all-cash offers
If you want to make a stronger offer or are competing with cash bids, a verified pre-approval can provide you and sellers with the same confidence of an all-cash offer. With a Better Mortgage verified pre-approval, your financial documents are fully vetted with a hard credit check and have been underwritten.
Lenders need detailed, verifiable information to tell you how much house can you afford
There are many specific financial factors that lenders need to consider before they can give you a mortgage pre-approval, most of which you can’t easily enter into an online calculator.
For example, lenders may request the following information:
- Not just your current salary, but also proof of your earnings for the past two years via W2s and/or tax returns
- Not only your overall income, but also the specific components (bonuses, commissions, and more)
- Not just your credit score, but also the types and amounts of your other debts, and any other information on bankruptcies, liens, and judgements, too
- Not just the size of your down payment, but also your bank and asset statements (particularly if the funds you’ll use appeared suddenly or only recently in your account)
- Sensitive information, like alimony or child support payments (and legal documents to prove they exist)
Why mortgage lenders need detailed financial information
As a result of the 2008 housing crisis, lenders are much more conservative today. They want to ensure that when you take out a mortgage, you’ll be able to afford those payments for years to come. While a snapshot of your current finances is a start in determining how much you can afford, additional documentation can help lenders predict your future ability to pay.
For example, lenders want to know that your earning potential is consistent. One year of big bonuses doesn’t count as steady, guaranteed income. Lenders are also looking for red flags. They want to make sure your down payment funds are truly yours, not money you may have borrowed, and that the amount of debt that you’re currently carrying isn’t going to interfere with your ability to make your mortgage payments.
Anomalies or outliers in your financial profile won’t necessarily disqualify you from getting approved for a mortgage; however, they can impact the total amount you’ll end up qualifying for. Or, depending on the circumstances, it could mean that your lender would increase interest rates, require a higher down payment, or even require a co-signer to help them assuage any risk associated with the loan.
Beyond the mortgage affordability calculator: Ensuring you can afford your dream house
The more personal, detailed, verifiable information you can provide a lender upfront, the more certainty they can give you when it comes to how much you’ll actually qualify to borrow. When you’re competing with other homebuyers for your dream home, certainty matters.
A Better Mortgage calculation: How much you’re really approved to borrow
At Better Mortgage, we’ve been working around the clock to make getting that certainty as quick and painless as possible with our verified pre-approval.
How it works:
- You securely submit your documents (such as W2s and pay stubs) to us online, at any time of the day.
- If you’re a qualified borrower, we can provide a verified pre-approval letter detailing how much of a mortgage you are actually approved to borrow.
- You can go house hunting with a document that lets sellers know that, barring any unforeseen issues during the appraisal process or property or loan verification, you’re all but guaranteed to secure funding for the house. This can make your offer really stand out in competitive markets.
There are no fees to get the letter and no strings attached. Once you’ve received your verified pre-approval from us, you can also play with adjustments to your borrowing, down payment, and mortgage type to see more accurate, worthwhile calculations. And, you can get a new letter at any time based on a lower maximum purchase price, in case you don’t want to disclose to the seller the full amount you can afford to borrow.
While Better Mortgage offers a home affordability calculator, a little extra effort to obtain a verified pre-approval letter can provide you with the reassurance that you can afford and get approved for a mortgage to purchase your dream home.