How Much Should You Get Pre-Approved for a Mortgage?

When searching for mortgage loans, you should ensure you get preapproved for an amount that you can afford. That’s because a mortgage pre-approval lets you know how much a lending institution would be willing to loan you, not necessarily how much you are willing to pay for a home. In other words, just because you can take out a loan for a certain amount doesn’t mean that it’s the right amount for you.

Alongside your budget, the prices of the homes you are considering also determines how much you should get pre-approved for. A mortgage pre-approval can set your offer letter apart from other eager potential buyers because you are less risky to sell to. A lending institution has already said they will provide the necessary funds, so the deal is more likely to go through than with a buyer who hasn’t been pre-approved. So how can you balance getting pre-approved for an amount that helps you stick to your budget while also giving you the opportunity to put in an offer on your dream home? That’s exactly what we’ll be covering in this article. Let’s get started. 

What Determines How Much You Get Pre-approved For?

Lenders determine how much you get pre-approved for, and they calculate this number based on your financial situation and how risky it would be to give you a loan. In essence, your lender is investing in you, and will receive a return on their investment through your payments plus interest. If they feel that you are likely to miss payments or default on your loan, then you are less likely to get pre-approved. The key pieces of  your information that lenders consider are:

  • Income and Employment History: To prove you will be able to make regular payments on your loan, lenders want to see you have a consistent flow of money coming in. It’s important to show you can hold employment and your earnings are enough to cover your payments.
  • Credit Score and History: Lenders also want to see how you manage your debts. Your credit score provides a snapshot, while your history offers a more detailed report of the debt you’ve taken on and how much you’ve paid back. Commercial banks prefer minimum scores of at least 680-700. IMCU has a mortgage loan program for credit scores starting as low as 640.
  • Debt-to-Income Ratio: Your debt-to-income ratio is calculated by dividing your monthly debt payments by your monthly income. You want this number to be lower rather than higher because it shows the portion of your income that you owe to other creditors. Most lenders prefer a debt-to-income ratio of 43% or lower; however IMCU has some mortgage loan programs allowing for higher debt-to-income ratios up to 50%

That’s how lenders determine how much you should get pre-approved for a mortgage. But how do you make sure your loans stay within your budget? You can start with IMCU’s mortgage approval calculator, based on income and total monthly payment. By changing how much you can afford in monthly payments, your loan term, your interest rate, your property tax, and your home insurance cost, you can see what annual income you need to afford your dream home.

How Do I Get Pre-approved for a Higher Amount?

How to increase a mortgage pre-approval amount comes down to improving the aspects of your financial health that lenders consider: your income and employment history, your credit score and history, and your debt-to-income ratio.

For example, it may be a good idea to pay down some of your existing debt so your debt-to-income ratio and credit score improve. It’s also important to maintain a steady stream of income during the home-buying process, so it’s usually not the best time to quit a stable job for one with inconsistent pay. Finally, taking on other major loans—like a car loan—can hurt your chances of pre-approval. Space out major purchases to present a better case to your lender. 

What Happens If My Pre-Approval Expires?

Most mortgage pre-approvals expire after 30 to 90 days. IMCU mortgage approvals expire 120 days from your credit report date. Pre-approvals can be renewed, but the renewal process should be requested 2-3 weeks prior to expiration. Once a pre-approval expires, you may need to start a new application and  you’ll no longer be able to include your pre-approval letter with an offer. Your pre-approval may also lose validity if you go through a major financial change such as loss of employment, taking on a significant amount of debt, or defaulting on your current debt obligations. These can all increase your chances of getting denied after pre-approval. 

Get Pre-Approved with Confidence

The home buying process can be intimidating with lots of moving parts. Getting pre-approved is essential and can be simple especially when working with your local IMCU representative to guide you through everything you need to know about buying your dream home—including getting pre-approved. Ready to get started? Find an IMCU branch near you or begin the process online.  

Be Ready to Move Forward Once a Purchase Contract Is Signed

Once you get pre-approved, make sure you are ready to provide your lender with additional documentation they will require when you sign a purchase contract. Funds used for Earnest Money paid to the Seller and down payment must be documented and sourced for the last 60 days. Typically, bank statements are provided to document the funds. Your lender may require additional documentation to support large deposits listed on the bank statements. You will want to discuss locking your interest rate with your Loan Officer as well. Review the conditions attached to your pre-approval letter to identify all the documentation needed.