When house hunters receive a mortgage preapproval, it determines the budget for their house search. However, you can have a situation where your preapproval amount is lower than the value of the house you want to purchase.
There are numerous options that would-be homeowners can do to raise their preapproved mortgage amount. Continue to read below for an in-depth exploration of how you can increase your preapproval amount and grab that opportunity of owning your dream home.
What Is Mortgage Preapproval?
A preapproval mortgage is a procedure that defines the amount of money the lender will lend you to buy a house. It is a declaration from the creditor stating the loan amount the buyer is qualified to borrow.
A mortgage preapproval is helpful when you’re searching for a house because it can help you focus your search on properties you can afford.
Before the creditors award the preapproval, they need to investigate a person’s entire financial situation, such as details on their earnings, possessions, properties, credit history, and credit standing. To facilitate this investigation, the borrower must provide detailed documentation, which the creditor mandates, to show evidence that the borrower will be able to make the monthly mortgage payments. The preapproval amount the creditor will give is contingent upon the extensive review and thorough analysis of the borrower’s financial status.Get a Quote
However, it is noteworthy that the mortgage preapproval does not automatically mean that the borrower will obtain that mortgage exactly. Instead, a mortgage preapproval letter is merely an estimate of what is possible and not an assurance.
And once the borrowers are prepared and equipped to settle on the purchase of a house, the creditor will verify the financial status to ensure that the borrower’s capacity to pay off the loan hasn’t changed. That’s when preapproval moves toward approval.
How Does Mortgage Preapproval Work?
A mortgage preapproval letter is an official communication from the creditor that indicates the amount of money the borrower has been approved to borrow, the interest rates, and the terms and conditions of the home mortgage. As mentioned, creditors will scrutinize the borrower’s financial status to determine the amount of the mortgage.
Being preapproved for a mortgage is not mandatory. However, it’s helpful for several reasons. First, it establishes your house hunting budget. Also, getting preapproved will indicate to the sellers that you’re serious about purchasing a house, since you’ve started the process of the mortgage and have had your financial viability verified. When the sellers consider the bids on their homes, they often weigh whether or not a prospective buyer has a preapproval letter. Plus: Many real estate agents want a preapproved mortgage before giving a tour of the property.
How Much of the Preapproval Amount Can You Afford?
Before wondering how can you increase your preapproval amount, you must ask yourself how much of the preapproval amount you can afford. Being preapproved for, say, $250,000 doesn’t mean you can swing the payments comfortably. The lender’s estimate of what you can afford won’t always agree with yours. Try calculating different mortgage payments with an online calculator.
Since the preapproval mortgage is the initial stage in getting a loan, it includes a deep dive into your earnings, credit history, and assets. Your financial information and condition will influence the amount the creditor will preapprove. But it’s still just an estimate of what you can afford.
You must be the one to decide how the estimated loan payment will affect your monthly budget and whether it makes sense to buy a home priced at the top of your budget, or perhaps you should aim somewhat lower. Even though it is exceedingly appealing to look for a costlier house that includes all your preferences—such as the design, the layout, the number of rooms, and the yard—your budget might not be capable of sustaining a bigger house mortgage.
Many property experts suggest that would-be homeowners not spend more than 30% of their monthly gross income (before taxes) on their residence, including mortgage, property tax, utilities, insurance, and association fees.
The mortgage preapproval letter will specify the amount that the bank is ready to lend the borrower. The dollar amount is according to the creditor’s evaluation of what the person can pay based on earnings, assets, credit history, and credit standing. It is a good estimate, but you are the best judge of what you can comfortably afford.
How Can You Increase the Amount of Your Mortgage Preapproval?
You can take the following steps to help increase the amount on your preapproved mortgage.
1. Build up your credit score.
When anyone is purchasing a home, credit scores are extremely important. If you are a property seeker with an excellent credit score, it can help you to acquire a bigger loan at a lower interest rate.
For those property seekers who have lower credit scores, there are numerous ways to boost it, such as using your credit card for automatic monthly charges for your utility bills. You also want to make sure you are not maxing out your credit cards, and are paying your monthly bills on time.
Remember, once you build up your credit score, the creditor will most likely increase the preapproved amount since creditors usually scrutinize your credit score to evaluate your financial competence.
2. Earn additional revenue.
An alternative and productive means to boost the amount of your preapproval mortgage is to raise your financial capacity by producing extra revenue. Aside from your paystub, creditors will also take into consideration, upon checking your application, other sources of income. This could be income from rentals, financial support or allowance, investment properties, and the like.
Once you give the creditor documents that prove your added revenues (usually tax returns), it will prove that you possess a stable and consistent funding basis that can be utilized for repaying the mortgage. Higher revenues will likely lead to a bigger preapproval amount since they show you can manage a higher mortgage payment, thanks to the extra revenue you bring in.
3. Decrease or settle your debts.
Once you apply for a loan, the creditor will figure your DTI, or debt-to-income ratio, which is the computation of the total monthly debts divided by the gross monthly income. If creditors find out that your debt liabilities are excessive, they might doubt your ability to make the monthly payments on the loan. So, if you have higher debts, you may want to decrease or settle them prior to requesting a preapproval mortgage.
Once you have paid down more debt, your DTI will tilt in favor of monthly revenue, which will put you in a better position to undertake a bigger loan payment.
4. Increase your down payment.
If you can make a down payment greater than 20% of the home price, you might be able to take on a higher mortgage payment, and a preapproval letter would say so. This is because putting 20% or more down frees you from the obligation to carry private mortgage insurance (PMI). That’s extra money in your pocket every month, which you can redirect toward a mortgage payment.
5. You may choose a longer term.
Another way to increase your preapproval amount is by choosing a longer-term mortgage. Although the money you save with a 15- or 20-year mortgage would be substantial, a longer mortgage term, like 30 years, will come with lower payments. For that reason, the creditor might be keen to give you a higher loan amount for 30 years instead of 15 years.
6. Look for a co-borrower.
A less common option for how you can increase your preapproval amount is to look for a co-borrower, someone who will buy the house with you. A co-borrower can be an immediate member of your family, such as your spouse, who can partake in the obligation of settling the loan payments monthly.
Final Thoughts on How You Can Increase Your Preapproval Amount
Raising your preapproval amount does not need to be as challenging or tedious as it may look. There are multiple strategies you can employ to help yourself obtain a higher preapproval amount, such as building up your credit score, boosting your income, raising your down payment, and finding a co-borrower.Get a Quote