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Transformation Advisory, LLC
DFWREAdvisors Group Blog

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Why Can You Pay $2,000 in Rent (Or Any Other Amount) but Not Be Approved for a Mortgage That Costs the Same Amount per Month?

Rents have increased quite a bit over the past few years for many renters, but even the most affordable rent can start to feel like money slipping through your fingers every month, with no long-term return. This often leads to renters considering buying a place of their own, so that their monthly housing costs go toward building their net worth, rather than a landlord’s.

Unless you come into a windfall of money, most people need to get a mortgage in order to buy a home, so getting a mortgage pre-approval to find out how much a lender will allow you to spend is the first step.

The process can be both exciting and perhaps a bit intimidating for some people. On one hand, there is the anticipation that you could be given the golden ticket to homeownership and be approved to spend as much (or even more!) than you thought you could afford. On the other hand, there is the potential disappointment that you could find out you don’t qualify and get denied for a loan.

But there is also another scenario: You could be approved for a mortgage, but not for anywhere near as much as you hoped for (or need) to buy a house you want.

When a prospective buyer gets approved, but for a monthly payment that is less than they currently spend in rent, or outright denied for a loan, it often makes them wonder: How is it that I can pay $2,000 in rent (or any other amount you may be paying) but not be approved for a mortgage that costs me the same amount per month?

Considering landlords often have an approval process you had to go through in order to qualify to rent their place, it seems reasonable and logical that if someone can afford to pay a certain amount in rent, then a bank should be fine with lending them as much money as that amount would cost to pay back on a monthly basis. But it isn’t quite that simple.

Landlords Might Be a Little Looser with Their Qualification Process

For starters, each landlord may have different standards they are looking for, and some may not even be all that careful about who they rent to, and just throw caution to the wind.

But some typical rules of thumb for landlords who do qualify their tenants are that:

  • The tenant doesn’t have a bad credit history.

  • The tenant has a monthly income that is at least 2.5 times the monthly rent. (In other words, if you want to rent a place for $2,000 a month, you need to make $5,000 per month.)

Those are decent standards for a landlord to consider, but they are nowhere near what a mortgage lender will consider.

In addition, some landlords may be willing to overlook poor credit or a lower income. They have more leeway and can make individual decisions, as opposed to lenders who have investors to protect and regulators watching over the decisions they make.

Lenders are typically considering laying out hundreds of thousands of dollars to a home buyer, so they need to make fairly certain you will be able to pay it back, or that they will be able to recoup their money if you don’t.

Sure, a landlord can evict you, and a mortgage company can foreclose on you. And neither of them really wants to deal with the time, effort, or cost it takes. But there is simply more on the line for a lender than there is for a landlord.

What May Impact How Much a Lender Is Willing to Let You Borrow?

Lenders and landlords alike consider some of the same criteria, but if you are being considered for a mortgage, they are going to not only consider more things, they are going to be looking more closely at them. Here are some of the things that may impact how much (if any) money a lender will approve you to spend per month in terms of a mortgage payment:

  • Credit history. As mentioned above, landlords may or may not look at your credit history. But they may just be looking to see if it’s “bad” or not, as opposed to your overall credit profile. Lenders will look at your credit history much more closely.

  • Your job history. A landlord most likely wants to know that you are employed, and may even verify that you are with your employer, but a mortgage lender wants to see that you have been employed for a certain period of time in the same field, and ideally with the same employer.

  • How much cash you have. While there are certainly loans that require a low down payment, most likely you will need some money to put toward a down payment. How much down payment you have will affect how much they feel comfortable lending you. Plus, they often like to see that you have some money left after making the purchase, so you have some reserves in your account. Remember, there are often additional costs when you own a home, like maintenance or higher utility bills.

  • How much other debt you have to pay each month. Lenders look at what is called your “Debt-to-Income Ratio” in order to assess how much of your income goes toward paying debt each month. While there are certainly exceptions, the percentages many in the industry claim are “ideal” tend to be 28% of your total gross monthly income goes toward housing, and 35% of your gross monthly income is allotted to your total debt payments.

So if you are pre-approved for a mortgage, but it is for less than you pay per month in rent, or are no approved at all even though you currently pay a certain amount of rent without an issue, just know that there are more factors a lender considers.

But even if you are initially not approved at all, or for a lower amount than you think you can spend per month, ask the lender what you need to do in order to be approved for the monthly payment you feel you can comfortably afford. They will be able to give you insight into the areas they need to see improvement.

Don’t give up and feel like it is a forever thing.

The Takeaway:

When someone who has been faithfully paying rent at a certain amount per month is either not approved for a mortgage at all, or for an amount that is less than they currently spend per month, it often makes them wonder why. However, just because you can afford to pay a certain amount in rent, doesn’t mean a lender will approve you for that same amount because they have stricter criteria and standards than a landlord typically has when considering whether you can maintain that monthly payment.

If you aren’t approved for as much as you feel you can comfortably handle per month, ask your lender for insight and advice as to what you can do to impact how much they will be willing to lend you, and once you have improved the conditions, ask them (or another lender) to reconsider the amount you are approved to spend.

Want to start the homeownership journey? Let's connect. We can help you put in place a plan to achieve your homeownership dream!


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