How to increase your mortgage preapproval amount
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The first step on the path to getting a dream home is to obtain a mortgage lender’s preapproval for a loan. A written agreement in principle to finance you, preapproval shows sellers that you’re serious about buying a home.
It also provides important information about how much money you can borrow, helping you estimate your monthly mortgage payment and providing a rough sense of how much home you can afford.
That’s all fine, but what if in the course of your house-hunting, you feel you need more money? Here’s how to increase your mortgage approval sum.
What is mortgage preapproval?
Mortgage preapproval is assurance from a lender that you’re likely to qualify for a mortgage.
You can get preapproved by more than one lender. The process involves submitting a basic application with some details about your financial situation: assets, income and debts. The lender uses that information to write a document saying whether you’re preapproved for a loan, and if so, how much you’d be able to borrow.
Preapproval does not guarantee that you’ll get a loan if you formally apply, or a loan of a particular size. When you submit the final mortgage application, your lender will do a deep dive into your credit history and finances to confirm all the details you provided and complete its full underwriting process. It will also want to appraise the property you’re mortgaging, to make sure it is of sufficient value to back the debt, and take other steps to make sure the loan isn’t a high risk.
Still, preapproval conveys that you are basically creditworthy, and have funds at your disposal to buy a home. Often, sellers demand proof of preapproval before they’ll even entertain a buyer’s offer.
How to get preapproved for a higher loan amount
Your preapproval will come with some basic details, including the amount that the lender expects you to be able to borrow. It will include details about the loan, including:
- Purchase price
- Loan amount
- Loan type
- Type of home
- Loan term
- Down payment
Usually, the preapproval shows the maximum purchase price/loan amount the lender will preapprove you for, and comes with an expiration date. If you try to make an offer on a home for an amount higher than you’re preapproved for, sellers are likely to ignore the offer because you won’t get approved for the loan.
To improve your preapproval loan amount, there are a few things you can do.
1. Improve your credit score
Your credit score plays a big role in your ability to get any type of loan. For a loan as large as a mortgage, having strong credit is essential.
The higher your credit score, the lower the interest rate of your mortgage will be. That will reduce the loan’s monthly payment. Because one of the key factors limiting your total loan amount is the affordability of its monthly payment, qualifying for a lower rate can help you secure a slightly larger loan — emphasis on the “slightly.”
“Having a higher credit score may allow you to qualify for a higher mortgage [amount], but only to a certain extent,” says Matt Hackett, operations manager at Equity Now, a New York-based mortgage lender. Still, every little bit helps — that extra $10,000 or $20,000 just might make the difference if you get caught in a bidding war.
To boost your credit score, be sure to make all your payments on time, and don’t max out the credit you have or apply for more credit while you’re trying to get the mortgage.
2. Show more income
Your income also plays a big role in how much you can borrow. The more you make every month, the more money you’ll have available to put towards a loan.
The good news is that you don’t necessarily have to get a much higher-paying job or snag a raise. In addition to salary or wages, you might be able to use other sources of reliable income to qualify, such as:
- Interest or dividends from investments
- Income from rental property
- Alimony or child support
- Money earned from a part-time job or side business (provided you’ve earned the income for at least the past two years)
- Income from a pension, retirement account or Social Security benefits
Realtor Denise Supplee, for example — co-founder of Spark Rental, a Pennsylvania-based website for rental property investors — needed more income to refinance, and thought of her live-in mother. “Originally, my mother was not on the loan, nor did we have her pay any of the expenses,” explains Supplee. “However, in the refinancing, I asked our loan officer if we could use her Social Security income to get the job done.”
3. Pay off other debt
When you apply for a mortgage, the lender looks at your debt-to-income (DTI) ratio, which is the percentage of your monthly earnings you’re shelling out to cover your minimum regular obligations.
Generally, a DTI ratio of 36 percent or less is considered ideal and can help you qualify for a larger loan. Several lenders are comfortable with even higher DTIs.
Paying off a credit card or installment loan can make a huge difference in this figure, explains Jennifer Beeston, senior vice president of mortgage lending at Guaranteed Rate in San Francisco, Calif. “Often, I will see on someone’s credit a debt with a $2,000 balance and $300 monthly payment,” Beeston says. “Paying that off is a quick and easy way to increase how much you qualify for.”
Reducing credit card balances with a balance-transfer card (that has a lower APR or an zero-interest period), refinancing an auto loan to lower the payment or consolidating debt into an installment loan could also help. Increasing your income is another way to reduce your DTI ratio, but paying off loans is just as, if not more, effective.
4. Put at least 20 percent down
You can effectively increase the value of your loan by avoiding extra surcharges on it. While some fees are inescapable, there are some costs you can duck.
Private mortgage insurance (PMI) is one such cost. Typically, borrowers who make less of a 20 percent down payment have to pay PMI each month. This insurance protects the lender if you stop making payments, but its premiums are paid by the borrower.
The average range for PMI premium rates is 0.58 percent to 1.86 percent of your loan principal, according to the Urban Institute, though some lenders, such as Chase, place it as high as 2.25 percent.
Imagine you get pre-approved for a $300,000 loan with 6 percent interest rate and 30-year term. Your monthly payment before escrow would be $1,800. If you pay $200 per month in PMI, that makes your total monthly payment $2,000.
If you have a big enough monthly payment to avoid the $200 per month PMI payment, you might be able to qualify for a larger loan. A $335,000 loan at 6 percent has a $2,000 per month payment, meaning avoiding PMI could boost your preapproval amount by as much as 10 percent in this scenario.
Using extra cash to buy down your interest rate could lower your monthly payment further, improving your maximum loan amount. “Not only will you qualify for a higher loan amount, but you will save thousands of dollars over time, too,” says Casey Fleming, a mortgage advisor and author of “The Loan Guide: How to Get the Best Possible Mortgage.”
5. Explore different loan types
Mortgages tend to come in two types, fixed-rate and adjustable-rate (ARMs).
Fixed-rate loans have a set interest rate that does not change. This offers predictability throughout the life of the loan. With an ARM, the rate – and monthly payment – of the loan changes over time. That means less predictability. However, ARMs tend to have lower initial rates than fixed-rate mortgages.
That lower starting interest rate can help you qualify for a slightly larger mortgage by reducing the monthly payment. ARMs come in several varieties, described as a 7/1 ARM, 5/1 ARM, 10/1 ARM, and so on. The first number is the number of years with the fixed rate. The second is the interval, after the initial period, at which the rate will fluctuate, with “1” meaning annually.
Keep in mind that your loan’s rate and payment will likely rise after the initial period, so you’ll need to find a way to afford those higher payments.
If you feel comfortable with the rate risk of an ARM, or if you plan to sell your home or refinance your mortgage before the fixed period ends, this option could help you get a lower interest rate and a bigger mortgage.
Also consider loan programs outside those of commercial lenders, such as FHA loans, which are insured by the Federal Housing Administration, and VA loans, which are guaranteed by the U.S. Department of Veterans Affairs, have more flexible guidelines that could allow you to borrow more.
However, they may have specific requirements, such as only applying to specific types of properties or only being available for certain groups of people.
6. Add a co-borrower
Adding a co-borrower to your mortgage, especially if that individual has strong credit and a steady income, might help convince a lender to offer you a larger loan. The co-borrower’s income, coupled with your own, increases the total income the lender can use to qualify you for a loan.
For example, if you make $50,000 per year, there’s a limit to the amount you can pay toward a mortgage each month, and therefore a limit to how much a lender will approve you for. Adding a co-borrower who also makes $50,000 per year increases that ceiling: now you’re an applicant with $100,000 in income, so you can better afford a larger loan.
Keep in mind that a co-borrower brings their liabilities as well as their assets to the table, though — and the lender’s calculation. If the co-borrower has a lot of debt or bad credit, adding them to the application could hurt, rather than help, your chances.
7. Build cash reserves
While you won’t necessarily need cash reserves to qualify for a mortgage, having additional assets in the bank or elsewhere can help you qualify for a bigger loan.
Showing that you’re financially responsible and have the savings to cover unexpected expenses or deal with financial issues makes the lender feel like you’re less of a risk. That could help make the lender more comfortable with approving a larger loan.
8. Get more than one quote
It’s always a good idea to get multiple rate quotes and loan offers — in fact, studies show comparison-shopping pays off over the course of a loan.
There’s another benefit, too, however: If you get multiple preapprovals, you’ll get multiple offers with potentially different amounts. If you really need a big mortgage, like a jumbo loan, you can go with the lender that offers the largest preapproved amount, even if the other aspects of the loan aren’t perfect.
With more than one offer, you also have the leverage to go back to a lender and see if they’ll increase the amount they’re willing to lend. You can also try to negotiate better rates and fees, helping you save money.
How much will I be preapproved for?
There’s no simple formula for determining how much you get preapproved for. Mortgage underwriters look at dozens, if not hundreds, of data points about you to determine whether to offer preapproval and how large a loan to preapprove you for.
The best way to get preapproved for a large amount is to have strong credit, little or no debt, and high, steady income. People with lower credit scores, limited or uneven income or high levels of debt will see lower preapproval amounts.
Getting preapproved is just the beginning of the homebuying process. Once you’ve found a home you like and submitted an offer that gets accepted, it’s time to move on to an official mortgage application. Have all of your documents, such as pay stubs and bank statements ready, and be ready to work with your lender to provide all of the information it needs to complete the underwriting process.