How to calculate your mortgage qualification
What’s behind the numbers in our ‘How Much Can I Borrow?’ mortgage calculator
When buying a home, the question “How much can I borrow?” should be the second question you ask. The most important consideration is, “How much house can I afford?” That’s because, even with all the angst involved in applying for and being approved for a home loan, lenders are often inclined to loan you more money than you expect.
That’s a surprising — and important — reality.
As much as you want to buy a home, lenders want to loan you money. And the bigger the loan, the happier they are. You’ll know why when you see the estimate of the interest you’ll pay over the life of the loan. It’s a really big number.
But if you know how much home you can afford, of course, you’ll want to learn how much you can borrow. The NerdWallet “How much can I borrow?” calculator can give you a solid estimate.
The calculator considers standard mortgage payment elements, such as principal and interest. Then, we take things a few steps further, factoring in taxes, insurance — even homeowner association dues — to help determine a real-life monthly payment.
We also examine your income and debt, just as a lender would, to determine the maximum home loan amount you’re likely to qualify for.
What a ‘How Much Can I Borrow?’ calculator does
The NerdWallet “How much can I borrow?” mortgage calculator utilizes an easy step-by-step process:
To begin, input:
- Your annual income (before taxes)
- The mortgage term you’ll be seeking
- The interest rate you’re likely to earn
- Your monthly recurring debt
If you don’t know how much your recurring debt payments add up to in a month, click the “No. Help me!” button. We’ll walk you through typical debts, like car loans and student debt.
At this point, we’ll estimate your property taxes and insurance. You can also adjust those numbers if you have specific estimates.
Enter monthly HOA dues (if applicable) if you know what they’ll be. If not, you can always come back to this later.
Now, your results will appear, including:
- An estimate of the maximum mortgage amount that NerdWallet recommends
- A ballpark of your monthly mortgage payment
- The maximum amount a lender might qualify you for
- And how much your monthly mortgage payment might be for that amount
How to use a ‘How Much Can I Borrow?’ mortgage calculator
With this calculator, you can run some “what-if” scenarios. For example, you may consider:
- How long will I live in this home? That can greatly impact your decision on whether to choose a 30-year fixed rate loan or a shorter term. The longer term will provide a more affordable monthly payment, but you’ll pay a lot more interest over the long term. A 15-year fixed-rate mortgage will cost you way less interest over the life of the loan, but your monthly payment will be considerably more.
- Is an adjustable-rate mortgage a better option for me? If you plan on being in this home for just a few years, a 5/1 ARM could be a good option. You’ll enjoy a lower initial interest rate that’s fixed for five years, but the rate changes annually after that.
- Am I trying to buy too much house? Sure, lenders may be more than happy to put your name on a big loan, but how do you feel about it? Are you comfortable with how it may impact your monthly budget, or are you feeling a bit stretched? Consider how your new home costs may impact your other spending goals, such as travel and savings.
- How much of a down payment should I make? It’s always the big question. Are you putting down as little as possible and having to make up for it with larger monthly payments — and possibly having to pay mortgage insurance?
Mortgage affordability 101
It’s not what you can borrow, it’s what you can afford
In some respects, the mortgage lending industry is working against your best interest. If you are deemed a qualified borrower, a lender is prone to approve you for the maximum it believes you can afford. But in some cases, that amount may be too generous.
Buying a home always means dealing with big numbers. And the impact to your budget may seem to be a stretch, particularly in the beginning. The challenge is buying a home that meets your current and future needs, without feeling like all of your money is in your home — leaving you without the financial freedom to travel, save for other priorities and have a cash flow cushion.
Now that the NerdWallet ‘How much can I borrow calculator’ has given you an idea of your buying power, you may want to gut-check the number by:
- Run affordability scenarios. You can get another view of your home-buying budget by running some what-ifs through the NerdWallet home affordability calculator.
- Talk to more than one lender. You are more likely to get a better interest rate by comparing terms offered by multiple lenders, and it might be illuminating to see the loan amounts different lenders will qualify you for.
- Consider all homeownership expenses. It’s not just what’s built into your monthly payment — such as insurance, taxes and the rest — but the other having-a-home expenses, like structural upkeep, new furniture, maybe even yard maintenance equipment.
What factors impact the amount you can borrow
Lenders consider several factors in determining the amount you qualify for, including:
- Your debt-to-income ratio. Our ‘How much can I borrow calculator?’ depends on an accurate input of your income and recurring debt. You’ll want to really hone those figures down to a fine point, because lenders will be using them too.
- Your loan-to-value ratio. This ratio is a function of the amount of money you put down. If you want to drill down on this calculation, use NerdWallet’s loan-to-value calculator.
- Your credit score. This number impacts the pricing of your loan, more than how much you’ll qualify for. But that’s really important. If you don’t know your score, get it here.
How can I qualify to borrow more?
If you’re disappointed by the ‘how much can I borrow’ results, remember that there are many factors at work. Small improvements in one or more can make a substantial difference:
- A bigger down payment always helps. The more money you put down, the better you’ll look in the eyes of the lender.
- Be a tactical buyer. If school districts won’t play a role in your family for years, consider finding a home in a transitioning neighborhood; maybe buying a starter home rather than a forever home. You’ll likely get a better home value and won’t need to borrow as much.
- Reduce debt; even a little. Paying off — or down — a credit card or two can help in several ways. Your debt-to-income ratio will go down and you may even get a nice bump in your credit score.