Sathi Roy (a no-commission Loan Consultant at Better) 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.
That’s because 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 calculators are pretty bad at giving a reliable answer. And for most homebuyers, what they end up qualifying for is often less (or at least quite different) than what their calculator told them.
Home affordability calculators rely on basic, stated information
It isn’t the calculator’s fault that it’s not accurate. Affordability calculators are designed to give you an approximate number, so you can get an idea for where to set the price slider when you’re browsing on your real estate app. But you’re giving the calculator some basic information about your income, credit score, debt, and down payment savings, when the devil is really in the details.
Lenders need detailed, verifiable information to give you a loan
There are a lot of specific financial factors that lenders need to consider before they can give you a loan, most of which can’t be easily put into an online calculator.
For example, lenders ultimately need to know:
- Not just your current salary, but proof of your earnings for the past two years
- Not just your overall income, but the specific components (bonuses, commissions, etc)
- Not just your credit score, but also the type and amount of your other debts
- Not just the size of your down payment, but also the source of your funds
- Sensitive information, like alimony payments (and legal documents to prove they exist)
Why do lenders need all this stuff? Contrary to what the 2008 housing crisis might have suggested, lenders today are highly risk-averse. A mortgage means you are committing to years, if not decades of payments. While a snapshot of your current finances is a start, lenders want to predict your future ability to pay. For example, they want to know that your earning potential is consistent, so one year of big bonuses doesn’t count as much in their eyes as steady, guaranteed income. Lenders are also looking out for red flags. They want to make sure your down payment funds are truly yours, not money you may have borrowed from somewhere else.
Having anomalies or quirks in your financial profile doesn’t necessarily mean you won’t be able to get a mortgage. Most of us have a few! But the reality is that they can lower the total amount you’ll end up qualifying for.
Ensuring you can afford (and get) your dream house
The more personal, detailed, verifiable information you can give a lender up front, the more certainty they can give you when it comes to how much you can actually borrow. And when you’re competing with other homebuyers for your dream home, certainty matters.
A Better calculation: how much you’re approved to borrow
At Better, we’ve been working around-the-clock to make getting that certainty as painlessly and quickly as possible with our Verified Pre-Approval Letter.
How it works: learn about verified pre-approval
- House hunters can submit their documents (things like W2s and paystubs) to us online, at any time of the day.
- For qualified borrowers, in about 24 hours or less, we can provide a Verified Pre-Approval Letter detailing how much house you are actually approved to borrow.
- You can go house hunting with a document that lets your seller know that, barring any unforeseen issues like with the appraisal process, 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 gotten your Verified Pre-Approval from us, you can also play with adjustments to your borrowing, downpayment, and mortgage type – calculations that actually mean something. 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 the full amount you can afford to the seller.
There are several home affordability calculators out there that can give you a ballpark of how much you can afford. But if you spend a little extra time and effort to submit concrete details and get a Verified Pre-Approval Letter, you can shop for your dream home with the certainty that you can afford it.