Use this **Mortgage Pre-Approval Calculator** to quickly estimate the maximum loan amount you may qualify for. Our calculation is based on standard Debt-to-Income (DTI) and Housing Expense Ratio (HER) guidelines used by most lenders.
Mortgage Pre-Approval Calculator
Mortgage Pre-Approval Calculator Formula
Formula Source 1 (CFPB – DTI) | Formula Source 2 (Bankrate – Ratios) | Formula Source 3 (NerdWallet – Amortization)
Variables
- Gross Annual Income: Your total income before taxes, used to determine Gross Monthly Income (GMI).
- Existing Monthly Debts: Total minimum payments for revolving and installment debts (e.g., auto loans, student loans, credit cards).
- Annual Interest Rate: The nominal interest rate on the proposed loan (as a percentage).
- Loan Term (Years): The duration of the loan, typically 15 or 30 years.
- Monthly PITI Estimate: Estimated monthly costs for Property Taxes, Insurance, and HOA dues.
- Maximum DTI Ratio: Your lender’s maximum allowable Debt-to-Income ratio (Total Debt / GMI).
- Maximum Housing Expense Ratio: Your lender’s maximum allowable front-end ratio (Housing Cost / GMI).
What is Mortgage Pre-Approval?
Mortgage pre-approval is a conditional commitment from a lender to give you a loan up to a specific amount. It’s based on a preliminary review of your finances, including your credit history, income, and existing debts. Getting pre-approved is a critical step in the home-buying process, as it shows sellers and real estate agents that you are a serious and qualified buyer.
The pre-approval process differs from a pre-qualification because it involves a hard credit check and verification of documents. Lenders use specific underwriting guidelines, primarily relying on two ratios—the Housing Expense Ratio (HER) and the Debt-to-Income (DTI) ratio—to determine your borrowing capacity. This calculator mirrors those guidelines to give you a realistic estimate.
How to Calculate Mortgage Pre-Approval (Example)
- Determine Gross Monthly Income (GMI): If your Gross Annual Income is $85,000, your GMI is $85,000 / 12 = $7,083.33.
- Apply DTI Constraint: Assuming a 43% DTI limit, your maximum total monthly debt is $7,083.33 x 0.43 = $3,045.83.
- Determine Max P&I (DTI): Subtract existing debts ($400) and PITI ($300). $3,045.83 – $400 – $300 = $2,345.83.
- Determine Max P&I (HER): Assuming a 28% HER limit, your max housing cost is $7,083.33 x 0.28 = $1,983.33. Subtract PITI ($300). $1,983.33 – $300 = $1,683.33.
- Choose the Minimum P&I: The lender will approve the smaller of the two P&I limits. In this case, $1,683.33 (HER constraint).
- Calculate Principal: Using the amortization formula with $1,683.33 as the P&I payment, a 6.5% rate, and 360 payments (30 years), the resulting principal is the maximum affordable loan amount.
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Frequently Asked Questions (FAQ)
Q: Is pre-approval the same as final loan approval?
A: No. Pre-approval is conditional. Final approval is only granted after the property appraisal, title search, and a final review of all financial documents are completed and satisfactory.
Q: How long does a mortgage pre-approval last?
A: Typically, a mortgage pre-approval is valid for 60 to 90 days. If the period expires, you may need to update your financial information and allow the lender to pull a new credit report.
Q: What is the main factor limiting my loan amount?
A: Usually, it’s the Debt-to-Income (DTI) ratio. Lenders want to ensure your total monthly obligations, including the new mortgage payment, do not exceed a certain percentage of your gross income.
Q: Do I need a down payment to get pre-approved?
A: While you don’t need the cash in hand for pre-approval, the lender will ask about your intended down payment amount to help determine the total loan principal they will pre-approve you for.