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I've been looking at mortgage calculators online lately since I plan on at least beginning to look into house shopping within the next 6-12 months (permitting I have enough saved by that time).

Basically all of the ones I've come across ask to use my gross annual (or monthly) income when determining how much I would be able to afford. Obviously I'm new to the entire homebuying process in general, but I don't quite understand the logic.

Is it mainly a factor for how much I'll be able to borrow? For my own personal reference, it seems like it would make much more sense to use what I'm actually pulling in to determine what I can afford.

Are these calculators accurately giving me affordable mortgages? I just have my doubts given that I might be making low 4k per month gross, yet could only be bringing in upper-ish 2k net so ti me, it makes more sense to determine these things myself based on net. Or am I just completely off base and over my head here? (I have definitely come to accept the face I am totally incorrect here)

I am in the US. I'm not exactly asking why a bank would look at X or Y, but rather if it's beneficial/necessary to consider my own gross income (as online calculators do) despite the fact that net income seems much more straightforward or if doing so would put me in some sort of situation where I am misrepresenting some piece of information that I would otherwise be utilizing correctly through gross.

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  • This is borderline on whether it is on topic. You should be asking questions about things you can control in personal finance. Why a bank looks at this or that for a loan is irrelevant, the fact that they do means you need to pay attention if you want a loan. You might consider rewording this to avoid having the question closed. Apr 22, 2016 at 16:49
  • Are you in the USA?
    – Pete B.
    Apr 22, 2016 at 16:55
  • @PeteBelford - Yes. Will edit to include. Apr 22, 2016 at 17:12

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For most first time home buyers in the USA their tax world changes considerably when they buy a home. Mortgage interest allows people, for the first time, to itemize their deductions. Once that threshold is crossed many other deductions become available. This allows a person to decrease their withholding and increase their take home pay.

Interest, insurance, property taxes, state tax deduction, etc all become available for deductions, which you were paying (indirectly) anyway.

Also if significant retirement savings reduces your take home pay, that can be changed in times of greater need.

When you actually do your actual mortgage application all will be looked at.

Keep in mind you are only doing a rough calculation. Also keep in mind the whole industry is built around getting you to spend more on a home. Both agents, the mortgage broker, the banks, and the local government all make more money if you spend more.

Caveat Emptor!

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    Ah, that makes perfect sense. So if I'm manually calculating what I can afford via net, I'm likely undershooting what I can actually afford because of these new tax deductions increasing what net may be after getting the loan? Apr 22, 2016 at 17:19
  • More than likely, see my edits.
    – Pete B.
    Apr 22, 2016 at 17:40
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    Gotcha. Definitely will keep in mind the "everyone will want you to spend more" portion, that is good advice. I realize it's an extremely rough estimate, but as long as I can guestimate a mortgage payment range within $X and it isn't too far from gross (which it sounds like it shouldn't be, if not somewhat safer), I'll be a happy man. Apr 22, 2016 at 17:45
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    Typical mortgage advice applies get a 15 year if you can, get off pmi as soon as possible. Conventional is better than FHA and FHA is better than VA.
    – Pete B.
    Apr 22, 2016 at 17:49
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    @DangerZone Consider a buffer as well. Home ownership comes with lots of surprise costs (and some less of surprises, but still costs) over time, many of them large. You need money in the bank for that.
    – user
    Apr 22, 2016 at 20:50

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