Why do different lenders pre-approve buyers at different purchase prices ?

When you start shopping for a home, one of the first steps is to get pre-approved for a mortgage. Often, a buyer will get pre-approvals from a few different lenders. When they do, they might be surprised to find that one lender preapproved them for a higher amount than the other. But, why? 


A Mortgage pre-approval letter will list a specific purchase price and loan amount. But most of the time the lender is preapproving you based on an expected monthly mortgage payment, not a loan amount. Mortgage preapprovals are based on what you can afford monthly based on your income, not necessarily how much the home cost. 


For example, lender #1 might estimate that your property taxes on a prospective home are $500/month and lender #2 is assuming that a similar home will have taxes of $400/month. Lender #1 is being more conservative, and lender #2 is trying to maximize your purchasing power. 

A difference of just $100/month on your mortgage payment can mean a $20,000 difference on your pre-approval! 


So, who is right? Well, neither of them are. The lender should be able to tell you what your maximum monthly budget is for your housing payment and provide you with tools to analyze the payment on each house to see if it fits your budget. 


With property taxes, homeowners' insurance, and possible HOA dues; a $2,500/month mortgage payment might afford a $300,000 home in one neighborhood and a $350,000 home in another! 


Moral of the story: the lender who pre-approves you should help you to set a monthly mortgage budget and give you the ability to apply that budget to each home in your search. 

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