Mortgage Pre-Approval Tips - Is it Smart to Spend the Max Amount?

By Myles Leva


Last Updated: May 21, 2022



When you get your mortgage pre-approval, you can lock in a favorable mortgage rate. You can also quickly see if any part of your application is problematic while showing sellers that you’re serious and staving off competition.

Despite this, mortgage pre-approval will not tell you how much you should spend upfront. You may win the bidding war, but you’ll always lose in the end if you spend more income on your house than you can afford.


How much of your pre-approval should you spend?

In short, you don’t need to spend the full amount you’re approved for, and you probably shouldn’t. Like many similar challenges in finance, it’s best to work around a budget. You should set your budget. Your pre-approval should not be seen as the thing that sets your budget.

It’s important to remember that the number you see on your pre-approval is simply the maximum that a bank is willing to provide you with. Banks aren’t always very conservative with that amount, and in most cases, you should spend less.

The only case where you should spend the maximum amount offered to you is when it fits into your own budget.

If you’re unsure how you should budget your down payment and subsequent mortgage payments, there are a few things you can do. The fastest and most modern solution would be to use a mortgage calculator. You can put as many different inputs as you want into a free mortgage calculator to determine what payment amount would be the right fit for you. After that, you can add these expenses into your existing personal budget.

Once you do all of the above, you can treat the figure you come up with as your maximum. If the maximum offered by your bank exceeds your personal maximum, then the smart thing to do is to opt not to spend the max amount.

By taking whatever your bank is willing to offer you now, you can easily face ongoing financial hardship.


How do lenders determine mortgage loan amounts?

You and your bank have very different interests when it comes to a mortgage loan agreement. It’s your responsibility to come up with your own budget and look out for your interests. Of course, it’s also helpful to know what your lender is thinking when they send you a mortgage offer.


Credit Score

Your credit score is one of the first considerations any lender takes into account.

Check your credit report for free to find out how your credit appears to lenders.


Debt-to-income Ratio

Your debt-to-income ratio is right up there with your credit score when lenders are assessing the risk of lending to you. The more debt you have as a percentage of your income, the riskier it will appear lending money to you.

If you owe more than 35% of your annual income in debt, you will probably have a rough time qualifying for any loan products.

Paying off debts quickly will immediately reduce your debt-to-income ratio. It will also fairly quickly improve your credit score. So, reducing your other debts before going for mortgage pre-approval is always a good idea.


Down Payment

With a few exceptions, a larger down payment is a worthwhile step to qualify for better rates and forgo mortgage insurance.

The larger your down payment (as a percentage of the entire loan), the less risk lenders will attribute to your mortgage. Veterans Affairs (VA) and Federal Housing Administration (FHA) loans (should you qualify) are the best options if you want to pay less than the conventional 20%.


Employment History

There are several other smaller factors that lenders look into. Job stability is one of the more significant factors. If you are employed full-time and have earned a steady income for years, you will be viewed as less risky than someone who just got their first job or who is self-employed.


Conclusions: How much mortgage can I afford?

As always, this essentially boils down to personal budgeting. You can make the most out of your mortgage by using a mortgage calculator to find out what it will cost on a regular basis. Then, you can adjust your personal budget to accommodate it.

Unless the house you’re looking for is very affordable to you, there is little reason to feel pressured into maxing what you are offered in your pre-approval. Like all financial matters, your mortgage terms should be agreeable to you on your own terms, as much as possible.

Photo by Mike Jones



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