How to Increase Your Mortgage Pre-approval Amount

How to Increase Your Mortgage Pre-approval Amount

Everyone knows that the more money you are pre-approved for the more house you can get. But do you know how to increase your mortgage pre-approval amount and perhaps more importantly, would you even want to? Well, I’ll start by telling you how and then you can decide if it’s for you or not. If you are curious about the rest of the home buying process, check out our blog How to Buy a House.

So how do they decide how much to pre-approve you for anyway? Lenders (any lender… mortgage, auto, credit card, etc) are looking for very specific things when deciding whether to pre-approve you. The top things that they are looking at are your credit history, (score and report), your down payment amount, and your debt to income ratio – also known as DTI. If you want to increase your mortgage pre-approval amount, you will need to adjust at least 1 of these three things. That being said though, these 3 things are very interdependent, and doing one will most likely have a positive effect on another as well.

Option 1 – Improve Your Credit History

Now, this is the most difficult and time-consuming way to go, because even if you fix any issues, it takes time for your numbers to increase. But let’s be honest for a moment, if you do Option 3, many of the things you do to help your DTI will also ultimately end up improving your credit history. So option 3 ends up being a double whammy of goodness.

Some things that you can do to improve your credit score include

• reducing the amount you owe on credit cards
• Not having too many lines of credit open
• paying medical and utility bills on time
• paying off any items that have gone to collections

Option 2- Increase Your Down Payment

Having more cash on hand to put down on a property can be beneficial in 2 ways.

1. Having more money to put down may help to increase the amount you can borrow.
2. Putting at least 20% down will eliminate the need to have Private Mortgage Insurance (PMI) and therefore will lower your payments.

That being said, it is often difficult to come up with the money you need for a 20% down payment. Especially with home prices being as high as they are. The median sale price for a house in Saline was $400,000 in December. That would require an $80,000 down payment to avoid paying PMI. Now, $80,000 may not mean much to Warren Buffet, but that’s a lot of money for most people, especially first-time homebuyers that don’t have equity to draw from.

Wondering what are some practical ways you could increase your down payment.  Try these

• Use your tax refund
• Get a second job
• Withdraw money from your IRA (be sure to talk to your financial advisor before doing this option)
• Get a home equity line of credit if you already own a house
• Borrow money from a family member (Use caution when doing this. Holidays could potentially get even more awkward.)
• Wait a few years while you put money into savings

Option 3- Decrease Your DTI

Decreasing your DTI is the easiest of the 3 options because there are so many things that you can do. Typically (but not always) lenders require a total DTI with your new mortgage to be no more than 36%. They also typically don’t like for the mortgage to be over 28% of the DTI. So for example, if you made $5,000 a month, and had no other debt, you could expect to qualify for a  mortgage amount that gives you a payment of $1,400 a month (5,000 x .28 = 1,400). However, if you make $5,000 a month and have a $400/month car payment and $500/month student loan payment, you could expect to only qualify for a mortgage amount that gives you a payment of $900 a month (5,000 x .36 = 1,800 and 1,800 – 400 – 500 = 900).

Try one of these to lower your DTI 

• Pay off one of your loans so that you no longer have to count that debt towards your DTI. This is a great option because even though you are essentially just trading one form of debt for another, mortgage rates are still so low that it will most likely be a lower interest rate than what you are currently paying on the loan. Plus most things you go into debt for don’t appreciate in value (i.e. cars), but a house does. So not only are you paying less interest, you are paying for something that historically goes up in value. 
• Increase your down payment. As we discussed earlier, a higher down payment equals a lower monthly payment which equals a lower DTI
• You could also get a second job to increase your income amount, but you would have to work there for 2 years in order for them to count the income so that may not help if you are wanting to buy now. 

Some things to consider before trying to increase your loan amount

While most people wish for a bigger and better house than they are pre-approved for, there is a good chance that pre-qualifying for a higher amount is not what is best for you in the long run. You want to make sure that buying a house doesn’t hurt you financially by being more than you can handle. That’s how you end up in foreclosure. Financially it may be best if you were to follow the steps above to increase your down payment and lower your DTI, but then not increase your pre-approval amount. Then you will have more breathing room to spend your money doing the things you actually want to do such as travel more. Be sure to talk to your financial advisor before deciding what is the best path for you and your financial health.

Here’s a mortgage calculator to help give you a better idea of how these options might affect you. 

Mortgage Calculator

You may want to also check out our blog Answers to Your Top 3 Real Estate Questions.

Thanks for reading!

Chrissy Myers

MI Home Team