How lenders decide how much to approve
A pre-approval amount comes mostly from three things: your debt-to-income ratio, your savings and your credit. Lenders add up your new housing payment (principal, interest, property taxes, insurance and mortgage insurance) plus your other monthly debts, and compare the total with your gross monthly income. Each loan type has its own guideline limits, and your savings must cover the minimum down payment and closing costs.
The usual limits by loan type
- Conventional: total debts up to about 45% of income (automated approval can go to 50% for strong files), credit score of 620 or higher, 3% minimum down for first-time buyers.
- FHA: about 31% for housing and 43% in total by the standard guideline (automated approval often allows more), credit score of 580 for 3.5% down or 500 with 10% down.
- VA: a 41% guideline plus a check of the money left over each month after expenses (residual income), no down payment, and no monthly mortgage insurance.
An example
A household earning $120,000 with $500 in monthly debt payments can spend up to $4,000 a month on housing under a 45% limit. With $50,000 saved, a 720 credit score and a 6.42% rate, that supports a home of roughly $520,000 with a conventional loan, once local property taxes, insurance and PMI are included.
What limits your number
The results show which limit you hit first: income and debts, savings or the loan limit for your county. That tells you what would raise it. Paying off a car loan lifts an income-limited budget; more savings helps only if savings are the limit.
Getting a real pre-approval
Once the estimate looks right, a lender will ask for recent pay stubs, two years of W-2s or tax returns, two months of bank statements and permission to check your credit. A pre-approval letter based on those documents carries far more weight with sellers than a quick pre-qualification, especially when several offers come in. Ask for the letter to show the price you’re offering on rather than your maximum.
Questions buyers ask
Is this the same as a pre-approval?
No. A pre-approval comes from a lender after checking your credit report, income and assets. This estimate uses the same rules so you know roughly where you’ll land.
How much house can I get approved for on $100,000?
Often around $350,000 to $450,000 depending on your debts, savings, credit, rate and property taxes. Enter your numbers above for an estimate.
Does pre-approval hurt my credit?
Lenders usually do a hard credit check. Several mortgage checks within a short shopping window typically count as one.