Does Mortgage Pre-Approval Include Down Payment?

Buying a home is an exciting milestone in life. However, navigating the homebuying process can be confusing, especially when it comes to financing. One common question homebuyers have is, “Does mortgage pre-approval include the down payment?”

The short answer is no. Mortgage pre-approval does not include your down payment amount. However, your down payment is an important factor lenders consider when determining your pre-approval amount.

In this article, we will break down what mortgage pre-approval is how down payments work and why you still need to save up a separate down payment when getting pre-approved.

What is Mortgage Pre-Approval?

Mortgage pre-approval is when a lender evaluates your finances and determines the maximum mortgage amount you can qualify for

The pre-approval process involves submitting documents to verify your income, assets, liabilities, and credit scores The lender will review these and issue a pre-approval letter stating the maximum mortgage amount they are willing to lend you.

Pre-approval is based on factors like:

• Income
• Credit score
• Debt-to-income ratio
• Assets and reserves

The pre-approval amount does not represent the final mortgage amount you will qualify for. It is merely an estimate to help you determine your price range when house hunting.

Why Doesn’t Pre-Approval Include Down Payment?

While the pre-approval considers your assets, it does not include the specific down payment amount needed to purchase the home. Here’s why:

The down payment is separate from the mortgage amount.

The mortgage loan is the amount you borrow from the lender to pay for the home. The down payment is the portion you pay upfront when you purchase. So they are two distinct amounts.

Down payment requirements vary.

Depending on the mortgage program, down payments can range from 3% to 20% of the purchase price. Since the lender doesn’t know what home you’ll buy yet, they can’t factor in an exact down payment amount.

You may use different sources for down payment.

While lenders verify your assets, your down payment funds may come from other sources like gifts or grants. These additional funds aren’t considered until you have a purchase contract.

The down payment affects loan-to-value ratio.

The higher your down payment, the lower your loan-to-value ratio which can qualify you for better mortgage rates. But lenders can’t factor this until you’ve identified your down payment amount.

How Much Down Payment Do You Need?

Down payment requirements depend on the type of mortgage loan you get. Here are typical down payment amounts:

• Conventional loans: Usually require 20% down payment.

• FHA loans: Allow down payments as low as 3.5%.

• VA loans: No down payment required for eligible veterans.

• USDA loans: No down payment required for eligible rural properties.

While low down payment programs exist, putting down less than 20% will incur mortgage insurance until you build 20% home equity. Mortgage insurance adds to your monthly costs.

Saving up enough for a 20% down payment may take years for some buyers. But there are options if you don’t have 20%:

• Piggyback second mortgage: Combines a primary mortgage with a second loan to cover the down payment.

• 80/10/10 loan: 80% primary mortgage, 10% second mortgage, 10% down payment.

• HomePossible: Conventional 97% LTV mortgage needing just 3% down.

• Down payment assistance: Grants or loans to cover some or all down payments.

Talk to a mortgage lender to review down payment options that best fit your financial situation.

Should You Get Pre-Approved Without Down Payment Funds?

If you don’t have down payment funds saved yet, you may be wondering if you should still get pre-approved. Here are some things to consider:

Benefits of early pre-approval:

• See price range you can afford with current finances

• Lock in mortgage rates earlier

• Stronger buyer position to make offers

• Know how much more you need to save

Risks of early pre-approval:

• Pre-approval expires after 60-90 days

• Financial changes could lower your approval amount

• May tempt you to make offers without adequate savings

Tips for early pre-approval:

• Only look at homes well below your approval amount

• Get re-approved closer to purchase date

• Extend close date to allow more savings time

• Find down payment assistance programs

While possible, it’s generally wise to delay pre-approval until you have most of your down payment saved. This prevents disappointment from expired pre-approvals and ensures you can follow through on a purchase.

How to Save for a Down Payment

Here are some tips for building your down payment savings faster:

• Reduce expenses by cutting discretionary spending, downsizing housing, lowering debt payments.

• Increase income by asking for a raise, taking on a side job, monetizing a hobby.

• Use windfalls like bonuses, tax refunds, and gifts for down payment savings.

• Explore down payment assistance through grants, loans, and employer programs.

• Contribute to a dedicated savings account and consider a high-yield one. Automate contributions from each paycheck.

• Use a mortgage calculator to determine the down payment target amount for your price range and never dip into these savings.

• Develop a monthly budget and strictly stick to it, prioritizing down payment contributions.

Saving up a down payment can take disciplined budgeting and smart financial moves. But the payoff of homeownership makes it well worth the effort.

Pre-Approval is Just the Start

Don’t let pre-approval distract you from the importance of saving diligently. A solid down payment improves your loan terms and makes for a smoother homebuying journey.

Work closely with a trusted lender to understand all costs involved. Get pre-approved when you’re close to your savings goal and timed with when you need financing locked for a purchase. Homeownership is a big achievement, so approach it prepared and let your lender guide you through the process.