Before you start shopping around for a home, it’s a good idea to know what your price range is going to be. A lot of future homeowners find themselves asking the same question, “What size loan can I qualify for?”.
For a lot of would-be homeowners, the day their mortgage broker calls and tells them the amount they’re prequalified for isn’t always a unicorns-and-rainbows kinda moment; often the amount you can qualify for may not always align with what you feel you can – or want to – spend. To avoid that crestfallen feeling of disappointment, you might want to turn to that handy-dandy friend of all potential homebuyers: the loan prequalification calculator.
A prequalification calculator takes your personal financial data, like your income, current monthly payment obligations, property taxes and insurance, as well as mortgage-related information including the interest rate and term of the loan you’re considering. Then, through the magic of computing, it tells you an estimate of the mortgage amount for which you’ll likely qualify.
Gimme, gimmee, gimmee!
Now, just because you can be prequalified for a certain amount, that doesn’t mean you have to use that amount; of course, paying less for a house is going to mean a lower monthly mortgage payment and that means more money for savings and just more breathing room in general in your budget. Ideally, when looking at the amount the mortgage company says you can spend, you also want to think about how much you’re comfortable paying each month for your mortgage. To do that, you may want to consider upcoming purchases that could have an impact on your budget, like replacing an old car in a year or two or paying for your child’s (or your own) tuition in the near future. You may also want to consider potential positive impacts on your income or budget, like paying off a car or other loan, finishing a degree or advancing in your career. But be forewarned: While these “what ifs” may be based on what feel like solid facts now, you never really know what the future is going to hold; so, in order to avoid getting in over your head, you shouldn’t put a lot of emphasis on potential future increases in income.
Don’t forget: The amount of your monthly payment also will vary based on the type of loan you select and the interest rate attached to that loan. For instance, because a 30-year fixed-rate mortgage is a long-term loan, the payments will typically be lower than a shorter term mortgage, like a 15-year fixed loan. Taking out an adjustable rate mortgage, or ARM, may make it look like you can afford more, but remember: these loans adjust – often sharply – at the end of the introductory term. That’s another reason why using a loan calculator is a good way to determine the upper limit of what you can reasonably expect as an upper qualification limit.