Learn how much home you can afford to set practical expectations for home buying.
Buying a home is exciting, but the process of making offers and getting mortgage approval can also be stressful. Loan prequalification can help reduce the stress by setting the right expectations as you hunt for your new home. It helps you determine how much house you can afford. It narrows your search and helps minimize the hassle of mortgage approval.
How to prequalify for a home
This free home loan prequalification does most of the work for you. It calculates things like debt-to-income ratio and housing ratio automatically.
- Enter your gross monthly income on the first line; gross income is what you earn before taxes and other deductions.
- On line 4 enter your total monthly debt payments, including auto loans, student loans and credit card debt. It should not include the monthly payment on your existing home if you plan to sell.
- Then, select the term of your loan and interest rate from the dropdown menus.
- Lines 10-12 tell you everything you need to know:
- Line 10 is the loan amount – this is the maximum limit on your new mortgage
- On Line 11 you can find the purchase price, which is the loan amount plus the down payment
- Then on Line 12 you can see the down payment you need to qualify. We have more information on down payments below the calculator.
Mortgage Prequalifying Calculator
5 Secrets to Overcoming Down Payment Challenges
#1: 80% LTV is only necessary for a traditional loan
LTV refers to loan-to-value ratio. If you have 80% LTV like you see preset on Line 11, it means you made a 20% down payment. This qualifies you for a traditional loan and means you’ll pay no Private Mortgage Insurance (PMI).
A 20% down payment is beneficial during approval, because it’s easier and offers more assurance you won’t be rejected. However, these days 20% is not required to buy a home.
#2: You can qualify for FHA loans with as little as 3% down
FHA loans make it easier to qualify if you don’t have the finances to make a 20% down payment. You can qualify for an FHA loan with a down payment as low as 3%. This would mean your LTV on Line 11 would be set to 97 instead of 80. As you can see, if you adjust LTV, it makes your down payment much more affordable.
#3: Less than 20% down requires PMI
If you put less than 20% down on your new home, you will pay Private Mortgage Insurance (PMI) at first. PMI is money that covers the lender until you achieve 80% LTV. It will increase your monthly payment slightly when you first make payments on your loan.
However, once you achieve 80% LTV, you stop paying PMI; that means the remaining balance on your loan is 80% or less of your home’s value. LTV decreases as you: (1) pay off your loan; (2) your home’s value increases over time.
#4: Down payment assistance programs can help you qualify
If you have trouble making a down payment on your own, down payment assistance programs can help you get approved. These are state, county and municipal programs that provide funds for a down payment if you move to a specific location.
In order to qualify for down payment assistance, you must complete a HUD-approved 8-hour homebuyer course. You will receive a certificate of completion that you can use to qualify for down payment assistance. These programs help you overcome the challenge of generating the funds for your down payment.
#5: Talk to a HUD-certified housing counselor!
Down payment assistance programs are highly specific to where you want to buy. So are other programs, such as closing cost assistance. If you want to buy a home but don’t know how to meet the initial costs, call a housing counselor. You can consult with a local, HUD-certified expert who knows how to get around common roadblocks to homeownership.