My Mortgage Lender Pre-Approved Me For Too Much
In today’s market, many homebuyers can’t get approved for a large enough loan to buy anything.
But then there’s a fortunate set with the opposite problem: they got pre-approved for way more house than they are comfortable with.
What do you do if you’re pre-approved for “too much?”
How You Can Be Pre-Approved For ‘Too Much’
Despite what you read in the headlines, mortgage guidelines are quite generous.
Lenders can approve strong conventional loan applicants for monthly payments up to 50% of their gross (pre-tax) income – and higher for FHA.
For conventional lending, someone making $10,000 per month could be approved with $5,000 in housing and debt payments.
That does not include non-debt expenses such as utilities, groceries, gasoline, phone bills, subscriptions, and other costs.
Fifty percent of gross income could strain most budgets. If you make $10,000 per month, you only see about $7,500 after deductions for taxes, medical insurance, 401k contributions, and more.
That $5,000 payment limit is more like 67% of your “real” take-home pay.
This leaves little wiggle room for expenses, savings, or an unforeseen loss of income.
That’s why you should decide on your comfortable housing payment before you talk to a lender. More on this later.
Find a knowledgeable lender here.
Do I Have to Buy a Home At My Full Pre-Approved Amount?
Your lender and real estate can’t force you to spend your full approved limit. It’s up to you to decide how much house you’re comfortable buying.
There are no rules against buying below your means.
A buyer might be approved for a $1 million home because they have a dual-income household, great credit, financial reserves, and almost no debt.
But they could buy a $250,000 home. It’s up to each buyer how much they are comfortable spending overall or on a monthly basis.
Deciding On Your Comfortable Payment
Determine your comfortable payment instead of using the pre-approval as your only reference.
This can be as simple as creating a budget and backing out a house payment using the below example as a template.
My Comfortable Home Payment | |
Gross Income | $10,000 |
Take-Home Income | $7,500 |
Debt Payments (Car, Student Loans etc.) | -$750 |
Expenses Not Including Rent (Gas, Car Insurance, Groceries, etc.) | -$2,000 |
Extra Expenses of Homeownership | -$300 |
Savings/Investment Goal | -$1,000 |
Buffer | -$450 |
Monthly Remaining | $3,000 |
Comfortable Home Payment (Principal, Interest, Tax, Insurance, HOA) | $3,000 |
You could also arrive at your comfortable payment by using a percentage of your gross or take-home pay. For example, some experts suggest using 28% of your gross income or 35-45% of your take-home pay for your mortgage.
Percentage-Based Home Payment | |
Gross Income | $10,000 |
28% of Gross | $2,800 |
Take-Home Income | $7,500 |
40% of Take-Home | $3,000 |
You could use any method as long as you are comfortable with your monthly costs. This is a personal decision. Get input, but come to a conclusion that you can live with long-term. Leave some room for error if your financial picture changes later.
Translate Your Comfortable Payment Into a Home Price
This is where you might need help from a lender, although you can an initial idea using a conventional mortgage calculator, or one for FHA or USDA loans.
Many factors influence your final home price, including the interest rate, property taxes, home insurance, HOA dues, and your down payment.
One common mistake is not factoring in all parts of your home payment. Your mortgage principal and interest are only part of it.
Principal & Interest | $2,000 |
Property Taxes | $450 |
Homeowners Insurance | $150 |
HOA Dues | $50 |
Total House Payment | $2,650 |
In this example, the lender would use the $2,000 principal and interest payment to calculate the mortgage amount, not the full $2,650.
And if you happen upon a house with high HOA dues or property taxes, for instance, this will reduce your maximum home price. Rerun the numbers for each home you consider buying.
Use a Custom Pre-Approval Letter for Each Offer
Let’s say your comfortable home payment translates to a $500,000 home price, but your pre-approval letter says $700,000.
It could be unwise to include the pre-approval letter as-is. The seller’s real estate agent could see this as a blank check and try to bid you up.
Instead, request from your loan officer a custom pre-approval. Match it to the amount you’re offering. This could give you more bargaining power.
Consult with your real estate agent, though. You might submit a pre-approval higher than your offer price to show you are well qualified. Your agent will know the best strategies for your market.
Should You Stretch Your Budget If You Can’t Find a Home?
You might end up reconsidering your maximum home price. Sometimes there aren’t many homes in your desired price range, or at least ones you’d live in.
This is okay and may take some budget re-prioritization.
For example, your target is to save $1,000 per month toward retirement, but this goal is eating into your maximum home price.
A home is arguably a better retirement plan than a 401k or IRA, even if the value doesn’t go up much. Buying now could mean you live in a mortgage-free home in 30 years rather than paying rent, which will likely double or triple by then.
Other homebuyers may cut other spending for vacations or a new car to allocate more funds toward their higher priority. It’s a personal decision for each homebuyer.
The good news is that, because you can qualify for more, you have the option to increase your homebuying budget. Congratulations. It’s a luxury many homebuyers wish they had.
Getting a Pre-Approval That’s Too High: A Good Problem
Buying under your means is a good feeling. It’s also nice to know you can increase your homebuying budget if you need to.
Being financially conservative has gotten you to the point of being over-qualified to buy a house.
Enjoy this status – it will serve you well as you look for homes.
