While window shopping for mansions on Zillow is fun, one of the most crucial steps in buying a home is figuring out how much you can realistically afford. There are thousands of tools out there to help you figure this out, but we will break down where most of those tools fall flat - and what you should be using instead.
The most common tool for figuring out how much home you can afford is a mortgage calculator. These calculators have you manually input your financial information, like your income, savings, and debt payments, then they estimate how much home you can afford. You can typically slide your down payment or monthly payment amount up and down to see how it impacts your buying power. They also might show you the mortgage they project you qualify for.
While helpful in getting a very rough estimate of how much you can afford, these calculators can be wildly inaccurate for your specific situation. Mortgages are complex loans with detailed guidelines across credit, debt, income, savings, and more. The result? Mortgage calculators are frequently wrong about how much house you can afford - sometimes by hundreds of thousands of dollars! Let's dig into the top three reasons these calculators can lead you astray.
First up are loan programs - or in other words, the specific kind of mortgage you qualify for. Not all mortgages are the same, and there are hundreds of different programs across hundreds of mortgage lenders. Intimidating, we know. There are some standard programs through federal-backed agencies like Fannie Mae, Freddie Mac, and the FHA. However, even within each of these agencies, there are many types of loan programs. For example, Fannie Mae offers HomeReady loans that allow for 3% down, HFA Preferred loans explicitly designed for low to moderate-income borrowers, high-balance, and jumbo loans for more expensive houses.
Each of these loan programs has specific criteria that you must hit to qualify for them. The criteria frequently include credit score, credit history, income, and savings. However, many programs have much more detailed qualification criteria. Some require that your monthly housing payment, like your rent or current mortgage, not change significantly with your new loan. Others require your income is below a county-specific percentage of average income.
These very specific criteria determine the programs you qualify for, which in turn determines how much you must put down on your house, the amount of debt you are allowed to have, and the interest rates you get. Unfortunately, mortgage calculators completely ignore this - they let you put in as much or as little down as you want, set your monthly payment wherever you would like it to be, and do not restrict the options you can change. While this would be ideal, it is not how mortgages work. It results in the calculator spitting out situations that, in reality, are impossible and might set back your home buying timeline.
Qualified Income and Debts
The second significant way mortgage calculators are wrong is they have you manually input your income and debts. While seemingly harmless on the face of it, this causes major problems.
Like loan programs, income and debt in mortgages are governed by intricate rules. These rules dictate how much your income and your debts "count" towards your debt-to-income ratio - a key number that determines how much of a mortgage you qualify for, if at any all. Debt-to-income is calculated as your monthly debt, like monthly auto or student loan payments, divided by your monthly income. These rules "qualify" your income and debts, essentially saying how much you have of each. Because of this, even though you may make $100,000/year, depending on the type of income, frequency, and stability, a lender could count it as low as $0 a year. Similarly, a debt with a monthly payment of $1,000 can be discounted entirely from your debt-to-income if it meets certain criteria, helping you potentially qualify for a larger mortgage.
Mortgage calculators do not account for this at all. Instead, they simply take the income and debts you put in at face value and don’t apply any of the existing rules. This can result in their projections being off by tens or even hundreds of thousands of dollars - especially if a lender would mark down your income.
Finally, mortgage calculators are often wrong as they rely on static information for things like PMI rates, HOA dues, interest rates, and more. This information is very dynamic, varying based on your personal financial information, location, and loan program.
For example, mortgage insurance rates vary substantially between different scenarios. FHA loans have a form of mortgage insurance with an upfront mortgage insurance premium that is often rolled into your mortgage and a yearly mortgage insurance amount based on the balance of your loan and your credit score. Conversely, conventional Fannie Mae mortgages often have private mortgage insurance from a third-party insurance company. These rates are set by various factors, like your credit score, how much you put down on your house, your location, and other factors. Meaning, that depending on which loan program you qualify for and pursue, your monthly payment for mortgage insurance can be vastly different.
Because mortgage calculators do not know your entire credit profile, location, and other financial factors, they cannot do this analysis to figure out which rates apply to you. Ultimately, this means they can give you the wrong rates, affecting not just your projected monthly payment but also how large of a mortgage you can qualify for.
While mortgage calculators are wrong in many ways, don’t fret, there are other options out there for getting an accurate idea of how much house you can afford: getting a pre-approval or using the Quo app.
A pre-approval is a formal offer from a lender that outlines exactly how much you can qualify for. You can get one through a mortgage broker or lender, but it requires several hurdles. First, you must go through the entire mortgage approval process. That means submitting mountains of documents, getting a hard credit check, and filling out a full mortgage application, all of which take considerable time and effort.
If you don't qualify for a mortgage, you will be denied a pre-approval and won't be able to see how much you can afford. If you do qualify, the pre-approval is only valid for a set amount of time (typically 90 days). Afterward, you will have to resubmit many of the same documents to get an updated approval.
Another option is to use the Quo mobile app. The Quo app uses the same mortgage guidelines that lenders use to show you exactly how much home buying power you have, how to improve it, and gives you the tools to work on it - all in the same app. It uses a soft credit check that doesn't impact your credit, and rather than requiring piles of paperwork to figure out how much you can afford, it connects directly to your finances and asks a few straightforward questions.
Plus, unlike a pre-approval that expires after 90 days, the Quo app helps you track your home buying power progress as long as you need to until you’re ready to buy a home. It also catches those issues that can prevent you from getting a pre-approval so you can see, specifically, what is holding you back from buying your dream home while still showing you how much it projects you could afford.
If you are tired of mortgage calculators giving you wrong information and are ready for the future of homeownership, download the Quo app today here: Learn more about Quo.