July 26, 2023
Find out how to set a budget for your home search – and learn what to do if your pre-approved loan amount won’t quite cover the price of the home you love.
Can I Offer More Than My Pre-Approval Amount on a Home?
Find out how to set a budget for your home search – and learn what to do if your pre-approved loan amount won’t quite cover the price of the home you love.
You’ve fallen in love with a home in your ideal neighborhood. It has all the bells and whistles you want and it’s in the price range you’ve guesstimated for yourself. It’s even got the perfect paint color and your sofa will fit just perfectly. You finally sit down with a lender, filled with anticipation, only to find out that you’ve miscalculated and your budget isn’t anywhere near where you thought it would be.
This is the reason that a pre-approved home loan is so important, but it doesn’t mean that you’re limited by the amount of your pre-approval. If you’re asking, “Can I offer more than my pre-approval?” read on to develop a gameplan for both your pre-approval process and your overall home buying experience.
Your pre-approval is the amount of money your lender is willing to loan you, not the amount of the home itself. The pre-approval amount plus the buyer’s down payment will match the offer price.
In some cases, especially in highly desirable and competitive markets, multiple offers may occur. This can drive up the price and make it difficult to predict how much the final sale price will be. It’s important to ensure that you don’t get carried away and offer more than you’re able to pay.
Unless your financial situation has changed dramatically for the better – for example, you’ve got a new, higher-paying job or have taken on a co-borrower to increase your buying power – your pre-approval is unlikely to change much. If you find that your homebuying budget is not adequate to help you secure a home in your target market, you may need to either change your home search criteria or save up additional cash to put toward your purchase.
If you are able to save up to 20 percent of the purchase price, you’ll avoid private mortgage insurance (PMI), which will give you more buying power. On top of that, you may be eligible for better financing terms, making your money go even further.
Your financial institution, whether it’s a bank or a credit union, can provide you with a proof of funds letter. This will be especially necessary if you are putting a fair amount of cash down along with your pre-approved mortgage amount. Talk to an officer at your bank to find out how quickly they can generate a proof of funds letter so that you’re prepared once you’ve identified a property to make an offer on.
When you’re making an offer on a home, your real estate agent will put together a package of documents to submit. Along with the sales contract and contingency documents, they’ll include both your pre-approval letter and your proof of funds.
One of the things that sellers fear most is going under contract, then having it fall through due to a failure to secure adequate financing. The more documentation you can provide, the more peace of mind they’ll have in accepting your offer.
Your mortgage lender will take a number of factors into consideration when determining how much your pre-approval will be. You’ll need to provide documentation so that the lender can review your records. These include:
In addition, your lender will make a hard pull on your credit report to determine the amount of your monthly debt obligations. In addition, they may ask for proof of your satisfactory rental history to ensure that you have paid your rent on time for the prior 12 months.
If you are planning to use gift funds provided by a family member, you will need to document their source. Ask your lender what is required to show proof of gift funds for your particular mortgage loan product.
If you are in the process of obtaining a divorce, you may need to provide documentation related to the process. In addition, your estranged spouse may need to sign a legal document to ensure that they have no rights to the property and that the property does not become part of the settlement agreement.
If you are using alimony, child support, or another court-ordered payment as part of the basis for your pre-approval, you will need to supply the court order that documents this payment.
If you have filed bankruptcy, had a house foreclosed on, or sold your house in a short sale, you may need to provide additional information to your lender. Talk to the lender about your financial history to determine how this will affect your timeline and approval.
One of the most important things you can do is to start communicating with your lender early on so that you can maximize the amount of your pre-approval. By comparing different loan products you may find that there is a difference in how much you are able to afford.
Ideally, it would be best for you to keep your homebuying budget a little below your pre-approval amount. This will help you make the most of your down payment and keep you from being overextended.
Remember, you don’t have to purchase a house at the top of your budget. If you love to travel, for instance, or participate in expensive hobbies, you may want to aim for a somewhat lower budget in order to keep your monthly mortgage payments affordable. This way you can maximize your discretionary income each month while also taking advantage of the many financial and emotional benefits of home ownership.
