Lending websites almost always offer mortgage calculators, designed to tell you what size mortgage you qualify for. Heck – even my site has one. They are fun to play with but they are useless! Here's why.
First, what interest rate will you plug in? This will vary depending on several important factors:
- credit score
- downpayment or equity
- loan amount
- type of loan
Next, a lot goes into determining your income and your “ratios”. If you receive a paycheck and it's exactly the same each payday, it's generally easy to figure out exactly what your income is. But if you contribute to a 401k or a medical account, receive overtime, are paid hourly, get bonuses – well, this changes everything.
Maybe you receive retirement income or unemployment income. Or did you just cash out your 401k and have seven all your retirement sitting in a savings account?
And if you're self-employed, don't even try to understand how a lender determines your income. It can be complicated, especially if you receive some W-2 income, some 1099 income, receive sporadic unemployment, have your own corporation, have inconsistent earnings year-to-year.
And what about debt? Your monthly payments on credit cards, vehicles, and other consumer debt is very important but not all debt is viewed equally. Are your vehicles on lease or purchase? Do you have ongoing child support or alimony, either paying or receiving? How much longer does your settlement say it will go on?
The answer to these questions is the reason I have a job. And the reason I always strongly encourage you to get pre-approved.
By all means, use a mortgage calculator to see what your monthly payment would be (without taking into consideration property taxes and homeowners insurance) but don't use it to qualify yourself.