A mortgage pre-approval is not a promise to lend you money. It’s a lender’s conditional assessment of how much you could borrow, based on financial snapshots taken weeks or months before closing.

That distinction matters because pre-approval shapes what agents show you, what sellers will negotiate with you, and how much you can realistically spend. In 2024, with rates hovering in the neighbourhood of 6.5 to 7.2 percent, that pre-approval letter carries weight in a slower market. But it also comes with hard limits that many buyers misunderstand.

What Pre-Approval Actually Does

A pre-approval letter tells sellers you’ve passed a basic financial check. The lender has verified your income, credit score, and debt-to-income ratio. They’ve looked at your bank statements. They’ve run a soft credit pull. None of this is binding.

The letter typically states a maximum loan amount, something like “up to $450,000.” That figure assumes your financial situation hasn’t changed between the pre-approval date and the day you close. It assumes you haven’t taken on new debt, changed jobs, or made large deposits that need explanation.

Pre-approval does two concrete things. First, it signals to sellers that you’re serious and that financing won’t collapse your deal. Second, it gives you a ceiling for offers. You know roughly what monthly payment you can carry.

The Math Behind Your Buying Power

Your pre-approval amount depends on four inputs: your gross monthly income, your existing debt payments, your down payment, and the interest rate the lender quotes you.

Most lenders use a debt-to-income ratio of 43 percent. That means your total monthly debt (car loans, student loans, credit cards, and the new mortgage payment) cannot exceed 43 percent of your gross income. Some lenders push to 50 percent for borrowers with strong credit and reserves, but 43 is standard (Freddie Mac, 2024).

A borrower earning $6,000 monthly can carry roughly $2,580 in total debt payments. If they have $800 in existing car and student loan payments, they can afford about $1,780 in mortgage payment. At 7 percent interest on a 30-year loan, that payment covers something like $254,000 in principal. Add a 20 percent down payment, and their pre-approval might read $317,500.

But that’s before closing costs.

Closing Costs Shrink Your Real Buying Power

Closing costs run between 2 and 5 percent of the loan amount. For a $300,000 mortgage, expect $6,000 to $15,000 in fees. These include the appraisal, title insurance, origination fees, property taxes, homeowners insurance, and attorney fees if your state requires them.

Many buyers think the pre-approval amount is what they can spend on the home price. It isn’t. If you’re pre-approved for $300,000 and closing costs are $9,000, you need $9,000 in cash on top of your down payment. Or you negotiate the seller to cover some closing costs, which reduces what you can offer on price.

In slower markets like 2024, sellers are more willing to cover 1 to 3 percent of closing costs. In hot markets, they won’t budge. Your pre-approval letter doesn’t account for this negotiation (National Association of Realtors, 2024).

Pre-Approval Doesn’t Lock in Your Rate

Most pre-approvals are valid for 90 days. During that window, the interest rate is usually not locked. The lender quotes you a rate, but it can change daily. If rates drop, you benefit. If they rise, your monthly payment climbs and your buying power shrinks.

A rate lock is different. You pay a fee, usually 0.25 to 0.5 percent of the loan amount, to lock your rate for 30 to 60 days. Many buyers don’t lock until they’ve made an offer and the home has appraised. That’s smart strategy. It keeps your pre-approval flexible while protecting you once you’re under contract.

In 2024, with rates volatile and the Federal Reserve’s path uncertain, locking too early can cost you if rates fall. Waiting too long risks rates rising before you close. Most loan officers recommend locking once you’re in contract and the appraisal is ordered.

Agent Commissions and Negotiating Room

Your pre-approval doesn’t change how agent commissions work. The buyer’s agent typically receives 2.5 to 3 percent of the sale price, paid from the seller’s proceeds. That’s a separate transaction from your mortgage.

What matters is this: if your pre-approval says $350,000, and you offer $350,000, the seller nets less after paying commissions and closing costs. In 2024, some sellers are asking buyers to cover a portion of the buyer’s agent commission, which further reduces your effective buying power. Your $350,000 offer might require you to pay $5,000 to $10,000 toward the buyer’s agent fee, leaving you with less cash for down payment or closing costs.

Pre-approval doesn’t account for these negotiations. You have to model them yourself.

Commercial and Rental Market Context

Pre-approval is a residential mortgage tool. If you’re buying a multifamily property (2 to 4 units) to live in one unit, pre-approval still applies. But if you’re buying a 5-unit building or a commercial property, lenders use different criteria. They look at the property’s income, not just your personal income. Pre-approval is irrelevant.

The rental market affects pre-approval indirectly. If you own rental properties, lenders count 75 percent of the rental income toward your qualifying income. But they also subtract the mortgage payment on those rentals from your available debt capacity. A rental property that generates $1,500 monthly in income adds $1,125 to your qualifying income but subtracts the mortgage payment (usually $1,200 to $1,400) from your debt capacity. Net result: rental income often hurts your pre-approval amount, not helps it.

The Pre-Approval Expiration Problem

Pre-approvals expire. If you’re pre-approved in January and don’t find a home until April, your pre-approval is stale. The lender will re-verify your income and run a fresh credit check. If your credit score dropped, or you took on new debt, your pre-approval amount might shrink.

In 2024’s slower market, homes sit longer. Buyers have time to shop. But that time works against pre-approval validity. Renew your pre-approval every 90 days if you’re actively looking. It costs nothing and