Buying a new home is one of the most exciting purchases you’ll ever make, but it’s also likely the biggest. While it’s easy to get wrapped up in browsing through properties on Zillow and fantasizing about what you can do with your new yard, spare room, or living room, what you really need to know is the answer to one question: “how much mortgage can I afford?”
Knowing exactly how much house you can afford is imperative to giving you the best chance of falling in love with a home you can actually buy, and gaining mortgage pre-approval is a key way to do this.
But what is mortgage pre-approval, how do you get it, and how much will you get pre-approved for? We’ll answer all your questions and give you some key tips about getting the pre-approval amount you’re looking for below!
What is Mortgage Pre-Approval?
Mortgage pre-approval is when you start the mortgage application process and get the go-ahead from your chosen provider to purchase a home within a pre-approved price bracket. For example, you may apply for a mortgage and your lender agrees to lend you anything up to $280,000.
You are then able to go and view properties and put an offer in straight away when you find a home you love. Provided the home meets the lender’s standards and you pass any final financial checks; your mortgage will have a good chance of going smoothly.
Is Mortgage Pre-Qualification and Mortgage Pre-Approval the Same Thing?
Pre-qualification is the very first step in getting a mortgage. Pre-approval is the next step.
Mortgage pre-qualification is a step you can take when you’re first thinking about purchasing a home but aren’t quite yet ready to be super serious about buying. Pre-qualification is an informal evaluation of your circumstances and financial health to find out what kind of mortgage you could expect. Can you get a $100,000 mortgage or $400,000? Chat to Lucy to get the skinny on what you could pre-qualify for.
Pre-Approval is a formal offer from a lender to loan you a certain amount provided your chosen home and your financial situation meet the agreed requirements when it comes to actually buying the home. These agreements usually last for 30+ days at a time, so you wouldn’t want to get pre-approval if you weren’t planning to move for another 9 months.
Why Apply for Mortgage Pre-Approval and Who is Mortgage Pre-Approval Right For?
Applying for mortgage pre-approval before viewing properties is beneficial because:
– It means you’ll know exactly how much you can spend
– Realtors and sellers take you seriously when wanting to view homes or put in an offer
– You won’t be quite so stressed once you find a home you love
Pre-approval is right for anyone who is serious about buying a home. Nowadays, many realtors won’t even show a home to someone who doesn’t have pre-approval, so it may even be a necessity in the area you’re looking to move to. Even if it’s not, the stress of putting in an offer and then losing a home you love because you can’t afford it or because the process is taking too long, is simply not worth it. So getting pre-approved is a proactive step you can take.
How Much Can I Get Mortgage Pre-Approval For?
How much you’ll get mortgage pre-approval for depends on a number of different factors that we’ll cover below, but one of the best ways to figure out how much you’re likely to be approved for is to use a mortgage calculator.
These calculators take into account your expenses and income level to give you an estimate of how much money you’ll be able to borrow and how much your monthly payments may be.
How is My Mortgage Pre-Approval Calculated?
Your lender will take into account:
– Your household income
– Any outstanding debt you already have that you will still have (your debt-to-income ratio) including credit cards, loans, and student loans
– Your savings and down payment amounts
– Any dependents (children and other relatives)
– How much you can afford monthly after food, utilities, entertainment, transport costs, and other living expenses
How Do I Increase My Mortgage Pre-Approval Amount?
It’s difficult to increase how much you can get at pre-approval on short notice, but if you’re researching this in advance there are a few things you can do to improve your credit rating and have a chance of a higher value mortgage. Here’s what you can do:
– Increase Your Income: Try to increase your income before you apply for your mortgage. Maybe now is the time to ask for that raise you are due for.
– Pay Down Debt to reduce monthly payments: try to pay down your debt overall, but it’s especially helpful to pay down credit cards and loans that aren’t commonly “long-term” payments. Lenders will expect you to have student loans and car payments, but they won’t feel the same way about thousands of dollars maxing out your credit cards.
– Increase Your Credit Score: this will happen automatically over time if you’re making some of the changes listed above (and below), but if you haven’t yet looked at your credit score and checked for errors, now is the time to do so.
7 Tips for Getting the Mortgage Pre-Approval You Want
- Work with a Professional: iLENDi works with multiple lenders, brokers and loan officers who can find the best mortgages available to you. Just pop in a few details by chatting to Lucy, our friendly 24/7 assistant.
- Know the Area You’re Planning to Buy in: it’s well worth researching whether there are any Home Owner’s Association fees to pay, as well as an estimate of your utilities, fuel costs, and anything else you can predict.
- Pay Attention to Your “Backend Ratio”: this is the percentage a lender is willing to lend you based on how much you can afford monthly, as a percentage of your gross income. The industry standard is 36%, though this does vary significantly depending on your circumstances and location. You can calculate this simply by gross income x 0.36 = ($ / 12), which is the maximum monthly mortgage payment you can afford.
For example, a combined income of $120,000 x 0.36 = $43,200 / 12 = $3,600.
- Minimize Your Debt: Pay attention to what % of your monthly income is going to maintain or pay-down debt. If 40% of your income is simply going to maintain your debt, you’re going to struggle to get a mortgage. If your debt is significant, focus on paying it down before saving for your down payment.
- Eliminate Non-Essential Spending: this does not mean you need to live as frugally as possible; it just means you should go through your expenses one by one and see if you can reduce or eliminate them. Do you have four different streaming services but only use one at a time? Pick one to keep for now, you can always get them again if you want to after you move into your new home.
- Don’t Try to Stretch Yourself: while it’s great having more money to spend on your home purchase, you need to remember that you are committing yourself to paying back a loan over as much as 30 years.
- Increase Your Credit Score: pay down debt, eliminate errors, and avoid taking out any new debt until you’ve bought your new home. Any new car payments or credit card applications can harm your ability to get a mortgage, even if you know you can afford them, so hold off from any other large purchasing decisions until you’re in your new home.
Start chatting with Lucy, your 24/7 assistant and we will get working on letting you know your requirements for approval.