Before you start looking for a new home, you should get pre-approved for a mortgage. That will let you find out how much money a mortgage lender is willing to give you to buy a house so you don’t waste your time focusing on homes that are out of your price range. If you get pre-approved, but the amount is less than you were hoping for, there are several ways to handle the situation.
Pay Down Debt
A lender looks at multiple factors when evaluating a mortgage pre-approval application. Your debt-to-income ratio is one of them. That’s the percentage of your gross monthly income that goes toward debt.
If your DTI ratio is high, a lender won’t feel comfortable offering you a large mortgage because you might not be able to keep up with the payments. Paying off some or all of your debt can reduce your DTI ratio and help you get pre-approved for a bigger mortgage.
Make a Larger Down Payment
The amount you put down on a house will affect the size of the mortgage that a lender is willing to give you. If you take out a conventional loan and put down less than 20%, you’ll have to purchase private mortgage insurance. That will add to your total monthly housing costs and reduce the amount of money that you can apply to a mortgage.
Putting down 20% or more will let you avoid PMI and free up more money that you can put toward a home loan. If you can make a larger down payment, a lender might pre-approve you for a bigger mortgage.
Try a Different Lender
Mortgage lenders look at the same factors when evaluating applications, but they consider that information in different ways. If you provide the exact same information to another lender, you might get pre-approved for a higher mortgage amount.
Adjust Your Expectations
Maybe you need to rethink your goals. Many people buy an expensive house, put a large percentage of their monthly income toward their mortgage, and become “house poor.” So much of their income goes toward housing costs that they struggle to cover other bills and have little or no money left over for other priorities, such as investing for retirement and taking vacations.
If the amount you got pre-approved for is well below what you were hoping for, it might be a much-needed reality check. You might have to accept the fact that you simply can’t afford an expensive house right now. If you buy a more modest home, you’ll be able to take some time to build equity and pay down debt, then upgrade to a house with a higher price tag later.
