The reasoning behind applying for a pre-approval from a lender is sound. They both let the seller know you are serious about the deal and they give you an idea of how much home you can afford. That begs the question "should you go over the pre-approved limit?". To find out more, read below.
What the Pre-approval Indicates
The pre-approval process includes a credit and income check. The lender looks at both your credit score and does a preliminary check of your income. That lets you know a certain price that you can expect to be approved for a mortgage later on. A pre-approval is not a guarantee of financing since more in-depth scrutiny is needed before that happens. You might find out, for example, that you are likely to be approved for a mortgage of $375,000. That means you should not make an offer for a home that exceeds that amount...or does it?
Use the Pre-approval as a Guide
Finding a home you can afford, love, and can get financing for can be a challenge. The pre-approval amount you are given should be used as the upper limit to offer when home shopping. That does not mean you cannot offer more than the pre-approval amount, however. As long as you pay attention to the below factors, you can go above the pre-approval level.
Watch Home Values
Before you can be approved for a mortgage, a professional appraisal must be performed on the home you are considering. The resulting home value has to come in at a price point that agrees with your mortgage. No matter how much you are pre-approved to spend, the appraised price must be at or lower than the amount of the mortgage.
Ask for More
In some cases, you might be approved for a mortgage that is a bit higher than the pre-approval but that is a gamble. You don't have to use the same lender for the mortgage application as you did for the pre-approval because you are not obligated to either lender. Your credit picture may have improved since the pre-approval to qualify for a larger mortgage but don't count on the numbers changing enough to make that happen.
Pay Down the Balance
The best way to deal with a more expensive home is to reduce the borrowed amount. That means getting the seller to either lower the price or paying a larger down-payment so that it's in line with the pre-approved loan amount.
Looking for a single-family home? Talk to your local mortgage lender to find out more about pre-approval and mortgage approvals before you being your home search.