Mortgage calculators are ubiquitous on real estate-related Web sites but that doesn't mean that they're helpful. See, Internet-based mortgage calculators take three figures into consideration when determining "how much home can you afford".
- Income
- Debt
- Downpayment/Equity
Next, the calculator figures in your downpayment, multiplies your income by a factor of .38 and spits out an answer: "You can afford x amount of a home."
By contrast, a true mortgage approval takes twenty-six factors into consideration.
Mortgage calculators like the one above specifically don't ask about:
- Credit score
- Recent bankruptcies
- Collection items
- Outstanding judgments or liens
- Intended use of property (i.e. investment property)
- Type of property (i.e. non-warrantable condominium, 6-unit)
And this is why mortgage calculators are dangerous and misleading.
Even assuming a person's credit history is "perfect", mortgage calculators can still steer you wrong. That's because mortgage calculators ignore "compensating factors".
A "compensating factor" on a home loan application is an exceptional strength that cancels out an exceptional weakness that would otherwise cause the loan to be denied.
One example is a person whose monthly debts are relatively high versus their income. This person can still be approved for a loan if the equity position in their home is very strong. The large percentage of equity compensates for the relatively low income and, thus, a loan that may have otherwise been denied can now be approved.
Compensating factors are an important part of the mortgage approval process and the online calculators just can't account for it.
The best alternative to Web-based mortgage calculators is to speak with a human mortgage calculator -- otherwise known as "a trusted loan officer". Only a human can tell you both how much home you can afford, and for what loan amount you would be approved.
