Your Pre-Approval Number: Now What?

That approval amount isn't your budget—it's your ceiling. Here's how to set a home budget that keeps you comfortable, not house poor.

Phase 2: Foundation Building Stage 2.3: Pre-Approval Achievement Resource 2.3B

What You'll Learn

Your pre-approval letter is a huge milestone, but it's just the beginning. This guide will help you understand what that number really means and how to use it wisely. Most first-time buyers make the mistake of treating their maximum approval as their target budget. We'll show you a better way.

What your pre-approval amount actually represents
Understanding the 28/36 debt-to-income rule
How to set a comfortable, realistic home budget
The true monthly cost of homeownership
Must-haves vs nice-to-haves in the DFW market
When to proceed vs when to wait and improve

What Your Pre-Approval Amount Actually Means

You've got the letter. It says you're approved for, let's say, $400,000. Time to start looking at $400,000 homes, right?

Not so fast.

Your pre-approval amount represents the maximum amount a lender is willing to let you borrow based on your income, debts, and credit score. It's a ceiling, not a target. Think of it like this: just because you're approved for a $30,000 credit limit doesn't mean you should carry a $30,000 balance.

💡
Industry Truth

The bank doesn't account for your Netflix subscription, gym membership, weekend hobbies, travel goals, or emergency fund contributions. They calculate what you can pay—not what you should pay. Most financial advisors recommend spending 10-20% below your maximum approval amount.

What Lenders Calculate

Lenders use standardized formulas—primarily your debt-to-income ratio—to determine what you can borrow. Their math assumes:

  • You have no significant unexpected expenses
  • Your income stays stable (or grows)
  • You don't have expensive hobbies or lifestyle preferences
  • You don't prioritize retirement savings, travel, or other financial goals
  • You're comfortable with most of your income going to housing

In other words, lenders approve you for the mathematical maximum—not the comfortable sustainable amount.

The 28/36 Rule: Understanding the Limits

Most lenders use a guideline called the 28/36 rule to determine how much house you can afford. Here's how it works:

The 28% Rule (Front-End Ratio)

Your monthly housing costs shouldn't exceed 28% of your gross monthly income. This includes mortgage principal, interest, property taxes, insurance, HOA fees, and PMI.

The 36% Rule (Back-End Ratio)

Your total monthly debt payments shouldn't exceed 36% of your gross income. This includes housing costs PLUS car payments, student loans, credit cards, and other debt obligations.

Example Calculation

If your gross monthly income is $8,000:

  • Maximum housing payment (28% rule): $2,240
  • Maximum total debt (36% rule): $2,880
  • If you have $400 car payment and $300 student loan: leaves $2,180 for housing
⚠️
Watch Out

Some lenders approve mortgages with debt-to-income ratios up to 43%, 45%, or even 50% for certain loan programs. Just because you CAN get approved at these levels doesn't mean you should. Higher ratios mean less financial flexibility, more stress, and greater risk if something unexpected happens.

A Better Approach: The Payment Comfort Method

Instead of starting with your maximum approval and working backward, start with your actual monthly cash flow and work forward.

Step 1: Calculate Your True Monthly Budget

Track what you actually spend each month, including:

  • Rent or current housing costs
  • Utilities (they'll likely increase with a house)
  • Food and groceries
  • Transportation
  • Insurance premiums
  • Entertainment and dining out
  • Subscriptions and memberships
  • Personal care and shopping
  • Savings contributions
  • Debt payments

Step 2: Add Hidden Homeownership Costs

Homeownership comes with expenses beyond the mortgage. Budget for:

  • Maintenance: Expect 1-2% of home value annually ($4,000-$8,000 on a $400K home)
  • Utilities increase: Houses typically cost more to heat/cool than apartments
  • Lawn and landscaping: $100-$300/month if you hire help
  • HOA fees: $0-$500/month depending on community
  • Pest control: $40-$70/month for regular service
  • Home warranty: Optional, $500-$800/year
💡
Pro Tip

A good target: aim for a payment that's no more than 20-25% of your take-home (after-tax) pay. This is more conservative than the 28% of gross income lenders use, but it leaves room for life.

Step 3: Determine Your Comfortable Payment

The question isn't "What can I get approved for?" It's "What monthly payment lets me live comfortably while still reaching my other financial goals?"

Setting Your Actual Home Budget

Here's a framework for converting your pre-approval into a realistic shopping budget:

The 80-90% Rule

Start your search at 80-90% of your maximum pre-approval amount. If you're approved for $400,000, focus on homes in the $320,000-$360,000 range. This gives you:

  • Room to bid over asking if necessary in competitive situations
  • Buffer for negotiation if issues come up in inspection
  • Monthly payment that won't stretch you thin
  • Breathing room in your overall budget

Calculate Your True Monthly Cost

For any home you're seriously considering, calculate the total monthly cost—not just the mortgage payment. For a $350,000 home in DFW with 10% down:

  • Mortgage payment (P&I at ~7%): ~$2,100
  • Property taxes (~2.2% in Texas): ~$640/month
  • Homeowner's insurance: ~$200/month
  • PMI (with 10% down): ~$150/month
  • Maintenance reserve: ~$350/month
  • Total monthly cost: ~$3,440

Notice that's significantly higher than just the "$2,100 mortgage payment" you might see advertised. This is why setting a realistic budget matters.

What If Your Pre-Approval Is Lower Than You Hoped?

First: take a breath. A lower-than-expected pre-approval isn't failure—it's information. And honestly? It might be protecting you from overextending yourself.

Common Reasons for Lower Approvals

  • Credit score: Lower scores mean higher rates and lower approval amounts
  • Debt-to-income ratio: Existing debts eat into your borrowing capacity
  • Income documentation: If income can't be fully verified, lenders use lower figures
  • Employment history: Recent job changes or gaps can affect approval
  • Down payment amount: More down = more home you can afford

Strategies to Increase Your Approval Amount

Quick wins (1-3 months):

  • Pay down credit card balances (reduces DTI immediately)
  • Pay off a small loan entirely (removes payment from DTI calculation)
  • Increase your down payment (gift funds from family can help)
  • Shop other lenders (different programs have different limits)

Medium-term improvements (3-6 months):

  • Continue credit score improvement (each point can help)
  • Document any income increases (raises, bonuses, side income)
  • Pay off larger debts to lower DTI ratio
  • Look into FHA loans (often allow higher DTI ratios)

Longer-term strategy (6-12 months):

  • Focus on career advancement/income growth
  • Pay off major debts like car loans
  • Build substantial additional savings for down payment
  • Consider a co-borrower if appropriate

Should You Wait or Start Looking?

This is one of the most important decisions in your homebuying journey. Here's how to think through it:

Consider Waiting If:

  • Your approval only covers homes you'd be unhappy with
  • Your credit score is below 680
  • You have high-interest debt you could pay off in 6-12 months
  • Your job situation is unstable
  • You'd be buying with less than 3% down and no emergency fund
  • Your DTI would be above 40%

Consider Proceeding If:

  • Your approval covers homes in areas you want to live
  • You can stay within 80-90% of your max approval
  • You have stable employment
  • You've saved enough for down payment, closing costs, AND emergency fund
  • Rent prices are comparable to ownership costs
  • You plan to stay in the area 3-5+ years
💡
The Middle Path

You don't have to buy tomorrow, but you don't have to wait forever either. Consider starting to casually view homes in your price range while continuing to improve your financial position. This helps you understand the market without pressure to make an immediate decision.

Must-Haves vs. Nice-to-Haves: DFW Reality Check

In a market like Dallas-Fort Worth, you probably won't get everything on your wish list—especially as a first-time buyer. Being clear about priorities helps you make faster, better decisions.

Defining Your Must-Haves

Must-haves are deal-breakers—things you absolutely cannot compromise on. They should be:

  • Things that can't be easily changed (location, school district, lot size)
  • Requirements for your daily life (number of bedrooms, commute time)
  • Safety or health necessities

Example must-haves:

  • 3 bedrooms minimum (growing family)
  • 40-minute max commute to downtown Dallas
  • Good school district (Frisco ISD, Carroll ISD, etc.)
  • No flood zone

Defining Your Nice-to-Haves

Nice-to-haves improve quality of life but aren't essential. These can be:

  • Things that can be added later (pool, updated kitchen, landscaping)
  • Preferences rather than requirements
  • Features you want but could live without

Example nice-to-haves:

  • Updated kitchen (can renovate later)
  • Pool (can add later)
  • Covered patio
  • Three-car garage (two-car would work)

Location vs. Size Tradeoffs in DFW

In the Dallas-Fort Worth market, you'll often face this tradeoff: a smaller/older home in a more desirable area, or a larger/newer home farther out. Consider:

  • Core suburbs (Plano, Frisco, Southlake): Higher prices, but established schools, shorter commutes, better appreciation history
  • Growth suburbs (Celina, Prosper, Forney): More home for your money, but longer commutes, newer infrastructure, schools still developing
  • Established urban (Richardson, Garland, Irving): Moderate prices, excellent access, some older housing stock

Neither choice is wrong—it depends on your priorities. But know that in real estate, location typically appreciates more reliably than house size.

Your Post-Pre-Approval Action Plan

You've got your number. Here's what to do next:

This Week:

  1. Calculate your comfortable monthly payment using the 20-25% of take-home rule
  2. Convert that payment to a target purchase price (use online mortgage calculators)
  3. Write down your must-haves vs. nice-to-haves
  4. Research 2-3 areas in DFW that fit your budget and requirements

This Month:

  1. Connect with a buyer's agent who knows your target areas
  2. Set up home search alerts for your criteria
  3. Start viewing homes to calibrate your expectations
  4. Keep building your savings (closing costs and emergency fund)

Ongoing:

  1. Protect your pre-approval status (no new credit, no large purchases, no job changes)
  2. Monitor your credit score monthly
  3. Stay engaged with your lender if questions arise
  4. Keep your documents organized for when you find "the one"

Key Takeaways

  • Your pre-approval amount is your ceiling, not your target—plan to spend 80-90% of your max
  • The 28/36 rule shows what lenders allow, but 20-25% of take-home pay is more comfortable
  • Total monthly housing costs include mortgage, taxes, insurance, PMI, maintenance, and HOA fees
  • Lower-than-expected approvals can be improved through debt paydown, credit improvement, and increased down payment
  • Must-haves should be unchangeable essentials; nice-to-haves can be added later
  • In DFW, location typically appreciates more reliably than house size—choose wisely

Ready to Turn Your Pre-Approval Into Home Keys?

Our verified network of DFW real estate agents specialize in working with first-time buyers

Choosing a Real Estate Agent → ← Pre-Approval Day Process Home Search Strategies →
Connect with a Verified Local Expert