Got Pre-Approved for a Mortgage? Here’s Why You Might Still Want to Borrow Less

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The amount of money you’re pre-approved to borrow isn’t necessarily reflective of what you can afford — or want to spend. Read on to learn more. 

It’s not an easy time to try to buy a home. As of late September, there was only a 3.4-month supply of homes on the market, as per the National Association of Realtors. That’s well below the four- to six-month supply typically needed to fully satisfy buyer demand.

Because of this, it’s important to present yourself as a serious buyer when you’re making an offer on a home. At a time when there’s lots of competition, you want any seller you work with to feel confident in your ability to get a mortgage.

It’s a good idea to seek out pre-approval from a mortgage lender. A pre-approval letter isn’t the same as an actual mortgage, but it’s a step in that direction. Basically, if your financial situation doesn’t change for the worse between when you secure mortgage pre-approval and when you apply for an actual mortgage, you really shouldn’t have trouble getting that financing.

But it’s also important to take your mortgage pre-approval with a grain of salt and be open to borrowing less than the amount you’re approved for. Here’s why.

Your lender doesn’t know the whole story

In the course of getting pre-approved for a mortgage, you’ll need to provide a lender with certain pieces of financial information, like your annual salary, pay stubs, and recent tax returns. You may also need to provide information on any outstanding debts you have. That will give your lender a sense of how much of a mortgage you can afford.

That said, when getting pre-approved for a mortgage, your lender isn’t going to look at every single aspect of your financial life. So if you have certain bills that are notably expensive, your mortgage pre-approval may not reflect them.

Let’s say you’re an applicant with three young children. Your mortgage lender probably isn’t going to ask if your kids go to daycare and what tuition there runs. They’re simply going to look at your income and debts to see what sort of monthly payment you can swing. But if you’re writing a check to your daycare provider for $800 a week, that’s going to affect your ability to pay a mortgage.

Run your own numbers

It may be that you’re able to get pre-approved for a $300,000 mortgage. That’s helpful, because it gives you a budget to work with. If you have $100,000 saved for a down payment, it means there’s really no sense in looking at homes that are listed at upward of $400,000.

But remember, just because you’re pre-approved for a $300,000 mortgage doesn’t mean you can comfortably afford one. So figure out what mortgage amount works for you based on your expenses and income. And then look for homes that allow you to stick to a price range you’re comfortable with. You may decide you don’t want to borrow more than $240,000, and that’s fine. Plugging numbers into a mortgage calculator can help you find a home price target to aim for.

Remember, you know your own finances better than any lender. So don’t get too hung up on your pre-approval number. Instead, come up with your own.

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