Understanding Mortgage Prequalification

A mortgage prequalification is an initial estimate from a lender of how much you might be able to borrow to buy a home. It's based on financial information you provide and is less formal than a pre-approval.

Prequalification vs. Pre-approval:

• Prequalification: A quick assessment based on self-reported information. It gives you a ballpark figure of affordability. It's often the first step.
• Pre-approval: A more rigorous process where the lender verifies your financial information (income, debts, assets) and checks your credit report. A pre-approval letter carries more weight with sellers.

This tool provides an estimate similar to a basic prequalification, based on the DTI ratios you input.

Key Factor: Debt-to-Income (DTI) Ratios

Lenders use DTI ratios to assess your ability to manage monthly payments and repay debts.

• Front-End DTI (Housing Ratio): Your proposed total monthly housing payment (Principal, Interest, Taxes, Insurance - PITI) divided by your gross monthly income. Lenders often prefer this to be around 28% to 31% or lower, but limits vary.
• Back-End DTI (Total Debt Ratio): Your total monthly debt obligations (including the new PITI and other debts like car loans, student loans, credit card minimums) divided by your gross monthly income. Lenders typically look for this to be around 36% to 43%. Some programs or lenders may allow higher ratios (e.g., up to 50-55% FOIR - Fixed Obligation to Income Ratio - in India, depending on various factors).

This calculator uses the *lower* affordable PITI derived from your target Front-End and Back-End DTI ratios to estimate your borrowing power.

Other Important Factors Lenders Consider (Not directly used by this simplified tool):

• Credit Score & History: A crucial factor. A higher score (e.g., CIBIL in India, FICO in US) generally leads to better interest rates and loan terms.
• Income Stability & Employment History: Lenders want to see consistent and reliable income.
• Loan-to-Value (LTV) Ratio: The loan amount compared to the home's appraised value. Your down payment directly affects this. Lenders have LTV limits (e.g., often requiring at least 5-20% down payment).
• Cash Reserves & Assets: Lenders like to see that you have some savings beyond the down payment and closing costs.
• Property Type & Condition: The property itself will be appraised.

PITI Components:

• Principal: The amount borrowed that you repay.
• Interest: The cost of borrowing money.
• Taxes: Annual property taxes, typically paid monthly into an escrow account.
• Insurance: Annual homeowner's insurance, also typically paid monthly into escrow.

This tool requires you to estimate annual property taxes and insurance for the type of home you are considering, as these vary greatly by location (e.g., rates in Kolkata, West Bengal will differ from other cities/states/countries).

Additional Home Buying Costs (Not part of PITI but affect total cash needed):

Besides the down payment and PITI, remember other costs:

• Closing Costs: Fees for loan origination, appraisal, title search, legal work, etc. (This tool includes an input for this).
• In India specifically: Stamp Duty and Registration charges are significant one-time costs when buying property. These are not part of PITI and are paid separately.
• Moving expenses, initial repairs, furnishing.

This Tool Provides a Simplified Estimate: The calculations are based on the DTI ratios and financial figures YOU provide. It's designed to give you a general idea of potential mortgage affordability. It is **NOT a loan pre-approval, loan offer, or a guarantee of credit.** Your actual borrowing power and loan terms will be determined by a lender after a full application and underwriting process that considers all relevant factors including a detailed credit assessment.