A lot of home buyers want to know if they can make an offer on a house for more than their mortgage pre-approval amount.
The short answer: A home buyer can offer however much they want for a house. But if the purchase price ends up being higher than the pre-approval amount, the buyer might have to pay the difference out of their own pocket.
Here are the five key points covered in the rest of this article:
- Home buyers often look at houses that exceed the amount they’ve been pre-approved for.
- And you can offer more than the pre-approval, if you believe the asking price is justified.
- But your mortgage lender will probably stick to the amount they pre-approved you for.
- You might have to increase your down payment amount to cover the difference.
- The lender will order an appraisal and probably won’t lend more than the appraised value.
What Does It Mean to Be ‘Pre-Approved’ Exactly?
This will all make more sense if we establish what a mortgage pre-approval means.
When you get pre-approved for a home loan, the lender will review your financial situation and tell you how much they are willing to lend you toward a home purchase.
(But that doesn’t mean you’re fully approved for the loan. Not yet anyway.)
After you’ve been pre-approved, you can start the house hunting process, choose a real estate agent to work with, etc. Eventually, you’ll make an offer on a home you want to buy.
Once you and the seller have signed a purchase agreement, you can go back to your mortgage lender to complete the underwriting and approval process. The lender needs to know how much you have offered and how much the home is actually worth, before they can complete the underwriting stage.
When a House Costs More Than Your Loan Amount
Let’s assume the home buyers go to their mortgage lender to get pre-approved for a specific loan amount. They then start the house hunting process and find a home they want to buy. But the house costs more than their pre-approval amount and the seller won’t reduce the price.
If you find yourself in this scenario, you have several options to consider:
- You could add cash to your down payment to cover the difference between your loan amount and the purchase price, if you can afford to do that.
- You could find another home to purchase, one that’s priced closer to your pre-approval amount.
- You could ask your loan officer if you qualify for a larger mortgage size, to get you closer to the purchase price of the house you want.
How you proceed will depend on your budget, the amount of money you have in the bank, and other factors specific to your situation.
Offering More Than the Pre-Approval
Here is what you need to know about the pre-approval process, as it relates to your purchase offer.
The pre-approval does not limit you to a certain home price. It only limits you to a certain loan amount. If you can make up the difference between these figures out of your own pocket, you could offer more than your mortgage pre-approval amount for a house.
If you can afford to do this, there’s nothing to stop you from pursuing it. But if you can’t afford the extra out-of-pocket expense, you’ll probably have to find a cheaper home closer to your pre-approval amount.
Showing the Seller You Have the Funds
When buyers who use mortgage loans submit a written offer to buy a house, they usually include a copy of their mortgage pre-approval letter. Or their agent might submit it on their behalf.
Either way, it’s important to show the seller you have the funds needed to complete the purchase.
It’s also common for sellers to request proof of funds from the buyer. They usually want to see evidence that the buyer has money in the bank for their down payment (and possibly their closing costs as well). Real estate agents refer to this as a “proof of funds letter,” fittingly.
Sellers want to make sure they’re not wasting their time (and taking their home off the market) for a buyer who won’t be able to reach the finish line and close the deal.
So, if you offer more than your pre-approval amount on a home, be prepared to show documentation that proves you can actually afford it.
How the Home Appraisal Ties into This
It’s also important to consider the home appraisal process, since it relates to your final mortgage approval.
Once you have signed a purchase agreement / sales contract with a seller, you will provide a copy of it to your mortgage lender. They will then hire a home appraiser to come and evaluate the property.
The appraiser’s mission is to determine the current market value of the property you’re buying. The lender uses the appraisal to ensure they aren’t lending more than the home is actually worth.
If you offer more on a house than the appraiser says it’s worth, it might create an additional obstacle for mortgage approval. In that scenario, you might have to work with the seller to reduce the asking price.
Other Considerations When Making an Offer
Here are some other things a buyer should consider when going above the pre-approval amount.
- Available Cash: Ensure you have enough savings to cover the price difference, down payment, and closing costs.
- Lender Flexibility: Check if your lender will approve a higher loan amount and be prepared for possible denial.
- Appraisal Value: If the home appraises for less than your offer, you may need to pay the difference or renegotiate with the seller.
- Higher Monthly Payments: A larger loan means higher mortgage payments. Make sure you can afford them.
- Emergency Fund: Avoid draining all your savings; maintain a financial buffer for future expenses.
- Contingencies: Include financing and appraisal contingencies to protect yourself if the loan or appraisal falls short.
- Seller’s Response: The seller may be hesitant to accept an offer dependent on uncertain financing.
- Market Conditions: Consider whether paying more than pre-approval is wise in the current market and for future resale value.
Summary and Conclusion
If you find a house that costs more than your mortgage pre-approval amount, you can certainly make an offer to buy it. Just keep in mind that the lender could limit you to the specific amount they pre-approved you for initially.
In that case, you would have to make up the difference between your loan amount and the sale price of the home in the form of a bigger down payment. The bigger the gap between the pre-approval and the purchase price, the more money you will have to pay out-of-pocket to close the deal.
Before considering this option, carefully evaluate your financial situation, consult with your lender, and assess the potential risks and rewards. Ultimately, the decision should be based on your financial goals and your ability to comfortably afford the higher payments.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author