How To Increase Your Mortgage Preapproval Amount
You got your finances in order to help you buy your dream home, and you organized a tall stack of paperwork to get a mortgage preapproval. You did everything right. But with home prices on the rise, you might discover that the price tag on your dream home is higher than the amount you’ve been preapproved to borrow.
Fortunately, there are ways to get preapproved for a bigger mortgage. We’ll walk you through some of the steps you can take to get a bigger loan and possibly get better terms and a lower interest rate.
How Do Mortgage Preapprovals Work?
A mortgage preapproval is a formal letter from a mortgage lender that states how much money you’re approved to borrow and at what rates and terms. Lenders sift through your finances to determine how much you can borrow, weighing factors such as your debt-to-income (DTI) ratio, credit score and assets.
A mortgage preapproval isn’t mandatory, but if you decide to get preapproved, it’ll be the first step of many involved in the mortgage process, and it shows sellers and real estate agents that you’re serious about buying a home because you got a jump-start on the loan approval process and got your finances verified by a lender.
When sellers consider offers on their homes, they sometimes factor in whether a potential buyer is preapproved for a mortgage. In fact, many real estate agents may require a mortgage preapproval before allowing you to tour a home.
How Can I Increase My Mortgage Preapproval Amount?
Sometimes, the amount a lender preapproves you for isn’t the final word on how much you can borrow. If you’re not satisfied with your mortgage preapproval amount, look at your finances for opportunities to increase your preapproval limit.
You may be able to increase your mortgage preapproval amount by reducing debt, generating more income or finding a different lender. Other common strategies to increase your preapproval amount include increasing your down payment, opting for a longer-term home loan or getting a co-signer.
Keep in mind that larger mortgages typically come with larger monthly mortgage payments. If you’re financially prepared to take on more mortgage debt and larger monthly mortgage loan payments, check out our steps to optimize your mortgage preapproval application.
Reduce your debt
Mortgage lenders look at your debt when assessing how much they’re willing to lend you. They’ll consider your DTI, which measures your monthly payment obligations (like credit card and student loan payments) against your gross monthly income. If your debt obligations are too high, lenders may question your ability to make your mortgage payments.If you reduce your debt, you can reduce your DTI and your credit utilization rate, which accounts for 30% of your credit score. (We’ll talk more about credit scores in a bit.) The best method (or methods) to pay down your debt will depend on your financial circumstances.
Credit Utilization Rate
Credit utilization is the amount of credit you’ve used compared to your total credit limit. It’s recommended that you keep your credit utilization rate (or ratio) below 30%.
Increase your down payment
Basically, it’s a win-win if you can manage to put down a larger down payment. For lenders, a larger down payment will eliminate the extra cost of private mortgage insurance (PMI). If you put down at least 20%, you won’t have to pay for PMI, and you’ll free up funds to make larger monthly mortgage payments. As a bonus, because of your increased borrowing power, you may get a loan with a better interest rate and better terms.
Boost your credit score
Depending on the lender, different loans will have different credit score requirements. But, in general, your credit score has a big impact on how much you can borrow, what type of home loan you can get and what terms you’ll be offered.
Lenders will typically pull your credit score for a preapproval to help assess your creditworthiness. So, before you apply for a mortgage loan preapproval, review your credit report and look for opportunities to improve your score. Some ways to boost or maintain your credit score include:
- Paying your bills on time
- Paying down credit card debt
- Disputing inaccurate items
- Not applying for new credit accounts
- Getting added as an authorized user on a credit card holder’s account
Some home loans help home buyers with bad credit scores enter the real estate market. Federal Housing Administration (FHA) mortgages, Department of Veterans Affairs (VA) mortgages and U.S. Department of Agriculture (USDA) loans typically have more lenient credit requirements and, in some cases, don’t require a down payment.
Add a co-signer
It’s a big ask, but you might be able to increase your preapproval amount by getting someone you trust to co-sign the loan. If the co-signer has good credit and a steady income, lenders might increase your preapproval limit based on your combined income.
But co-signing does come with some risks. The co-signer is legally responsible to repay the loan if you can’t. The loan and its payment history are recorded on the co-signer’s credit report.
Generate more income
One way to afford a larger mortgage is to boost your income. That might look like a raise at work, overtime or a higher-paying job. They’re all viable options, but many of them are easier said than done for most of us.
There are other ways to generate more income, including:
- Income from rental properties
- Interest or dividends from investments
- Income from alimony or child support
- Income earned from a part-time job or side hustle (Etsy, anyone?)
Get a longer-term loan
While the idea of paying off your mortgage in 10 or 15 years has some appeal, the monthly mortgage payment for shorter-term loans might not work for your budget. By getting a longer loan term, such as 30 years, you can stretch your mortgage payments and likely end up with more affordable monthly payments.
Lenders want to make sure you can keep up with your payments, so lower monthly payments over a longer term may help increase your preapproval amount. You should be aware that longer-term loans generally have higher interest rates. In the end, you’ll likely pay more for your mortgage than you would with a shorter-term loan.
You might also want to consider refinancing your loan once you’re in a better financial position.
It’s also possible to offset a higher mortgage rate and reduce your overall costs by making larger or extra payments over the life of your home loan.
Pro tip: Check your loan agreement before you start making larger or extra payments. Some mortgages come with prepayment penalties.
Find a different lender
You might find slight differences in underwriting standards across lenders. If you’re not satisfied with the mortgage preapproval from one lender, you can shop around with multiple lenders to see which one will give you a better preapproval amount and terms.
Lower your house buying budget
If you can’t increase your mortgage preapproval or aren’t prepared to go through the process of optimizing your finances, you may have to start looking for a more affordable house. You can still become a homeowner, you’ll just need to find your dream home in a more affordable price range.
Search for more affordable properties and revisit your house must-haves list. Were all those amenities must-haves? Can you live in a different area, would a smaller yard be the end of the world, are there a few condo amenities you can live without? There are plenty of ways to make homeownership affordable while finding a home that meets your needs.
Don’t Bite Off More Than You Can Chew
You can increase your mortgage loan preapproval amount if you can improve your credit score, bring your debt down or generate more income.
Sometimes it might make more sense to lower your house buying budget or push pause on homeownership rather than push for a higher preapproval amount. If you push too hard, you could end up with a higher loan amount that derails your monthly budget.
A good personal finance rule of thumb is to have no more than 30% of your gross monthly income go toward your mortgage payments. That should leave enough cash left over to afford your lifestyle and cover your other expenses.
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Determining Your Credit Score
- Your credit score is a three-digit number that’s used to predict how likely it is you’ll pay back money you borrowed.
- The score generally ranges from 300 (low) to 850 (excellent). It’s calculated by looking at your previous credit history.
- You can check your credit report to find the number or use a free credit tool. You can also plug in your best guess.
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Experian™. “What is a Credit Utilization Rate?” Retrieved April 2022 from https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/