Can You Get a Mortgage Loan for More Than the Purchase Price? A Detailed Guide

Buying a new home is an exciting experience However, it also comes with its fair share of challenges, especially when it comes to financing One common question homebuyers have is whether they can get a mortgage loan for more than the purchase price of the home. The short answer is yes, you can borrow more than the home’s sale price by tapping into your home’s equity or opting for specialty mortgage loans. However, there are some important factors to consider before taking this route.

Why Would You Want to Borrow More Than the Purchase Price?

There are a few main reasons why borrowers may need or want to borrow more than the purchase price when getting a mortgage

• Home repairs or renovations – Many homes require repairs, updates or renovations, especially older homes or fixer-uppers. A buyer may want extra funds beyond the purchase price to cover the costs of improvements.

• Furnishing the home – After buying a home, furniture and decor are often needed to make it feel like home. Extra borrowing can help furnish the space.

• Paying off debts – Some opt to roll high-interest debt like credit cards or personal loans into their mortgage to benefit from lower interest rates.

• Covering closing costs – Closing costs like appraisal fees, loan origination charges and prepaid property taxes can add up. Adding funds to cover these expenses may be desired.

• Purchasing in a seller’s market – In competitive markets with bidding wars, buyers often have to offer more than list price to win the home. An inflated purchase amount may be required.

Can You Actually Get Approved for More Than the Purchase Price?

Whether or not you can get approved to borrow more than the purchase price will depend on several factors:

• Your credit score and history – Lenders will thoroughly evaluate your creditworthiness before approving you for a larger loan amount. Good credit is key.

• Your debt-to-income ratio – Lenders want to see you aren’t overextending yourself. Your total monthly debts compared to income will be reviewed.

• Size of your down payment – The bigger your down payment, the less risk for lenders. Having 20% or more down helps your case for getting extra funds.

• Type of mortgage – Certain mortgages like FHA, VA and USDA loans have limits on how much you can borrow. Conventional loans offer more flexibility.

• Value of the home – Lenders will assess the value to ensure you aren’t borrowing more than the property is worth. The home must appraise for the loan amount.

If your finances check out, a lender may approve borrowing above the sales price. But just because you can doesn’t necessarily mean you should.

What Options Allow You to Borrow More Than Purchase Price?

If you’ve determined borrowing extra money is right for your situation, here are a few options to tap into additional funds:

• 203(k) loans – FHA product allowing up to $35,000 above purchase price for renovations

• Homestyle loans – Conventional mortgages covering renovation costs in excess of the sales price

• Home equity loan – Separate loan using home’s equity allowing you to borrow over purchase amount

• Cash-out refinance – Refinancing and taking cash out of your home equity provides funds beyond the mortgage

• Using gift funds – Getting gifted cash from family to supplement your mortgage may be possible

• Seller financing – The seller carries back a second mortgage/note to provide extra financing

• Jumbo loans – Specialty mortgages issued in amounts exceeding conforming loan limits

Each option has its own pros, cons and eligibility requirements. Consulting a mortgage professional is key to identifying the optimal loan product to meet your needs.

What Are the Pros and Cons of Borrowing More?

Below are some of the key advantages and disadvantages of financing above the purchase price that you’ll want to weigh:

Pros

• Pay for needed home repairs and renovations
• Consolidate higher-interest debts into mortgage
• Finance closing costs so you don’t pay out of pocket
• Buy your dream home even if over market value
• Tap home equity without having to sell

Cons

• Higher monthly mortgage payment
• More interest paid over loan term
• Potentially require larger down payment
• Higher debt-to-income ratio
• More difficult to qualify for financing
• Higher loan-to-value ratio

Looking at both the pros and cons objectively can help you decide if borrowing extra makes sense for your financial situation. Don’t take the decision lightly.

What Should You Consider Before Borrowing More?

Since borrowing more than the purchase price has major financial implications, properly evaluating whether it aligns with your circumstances and goals is crucial:

• How will a larger loan amount impact your monthly budget and other financial obligations?

• Are you comfortable with the higher monthly mortgage payment and overall increased interest costs?

• Will borrowing more restrict your ability to save or invest money elsewhere?

• Does increasing your loan-to-value ratio limit your options if you want to refinance or hurt your equity position?

• Could you delay the intended use of extra funds until you’ve built home equity?

• Are there alternative financing options like a secured loan or HELOC that may be preferable?

• Will the money be used in a way that increases the property value, like renovations?

Thinking through questions like these will position you to make a well-informed decision about borrowing above your purchase price.

Tips for Getting Approved to Borrow Extra

If you want the green light to borrow more than the sales price, here are some tips that can help your chances:

• Have excellent credit – Lenders favor borrowers with scores over 740. Fix any errors on your credit reports.

• Lower your debt-to-income ratio – Reduce monthly debts and try to keep your DTI below 36%.

• Make a sizable down payment – Have at least 20% down if going conventional. More is better.

• Choose the right loan – Conventional, jumbo and home equity loans offer greater flexibility than government loans.

• Document any gift funds – Lenders require paper trails for any gifted cash you plan to use.

• Get pre-approved – Having a pre-approval letter in hand shows lenders you’re qualified.

Taking these steps sets you up for getting approved to borrow more than the sticker price if needed.

Alternatives to Borrowing Above Purchase Price

If getting approved to finance over the purchase amount doesn’t work out, here are a couple options to consider instead of borrowing more upfront:

• Lower your offer – If in a bidding war, lowering your offer to stay under value may be wise.

• Save up post-purchase – Slowly save up for renovations or new furnishings without taking on more debt.

• Finance later with equity – After building home equity, utilize a HELOC to access funds.

• Prioritize must-haves – Compromise on wants vs needs if money is tight.

• Use gift funds strategically – Ask for gifted cash toward closing costs rather than inflated loan amount.

• Consult a housing counselor – Get guidance from a HUD-approved counselor if struggling with affordability.

The Bottom Line

At the end of the day, it is possible to get approved for a mortgage loan that exceeds the purchase price of the home you want to buy. But just because you canborrow more, doesn’t necessarily mean you should. Carefully examine your motivations for needing additional funds, and explore all your options to make the smartest financial decision. With proper planning and realistic expectations, you can determine if borrowing above the sales price aligns with your home buying goals.