Your Summer Pre-Approval Was Priced Near 6.66%. At 7.40%, the Same Payment Borrows About $29,000 Less.

If you got pre-approved for a mortgage this summer and you’re still house hunting, the number on that letter is probably too big. Not by a rounding error. By a nice car.

Freddie Mac’s average 30-year rate was 6.66% the week of August 27. On October 15 it was 7.40%. That’s three-quarters of a point in seven weeks.

How the letter got its number

A pre-approval isn’t a loan. The CFPB says so plainly: it “is not a guaranteed loan offer.” It’s a lender’s answer to one question on one day: how big a payment can your income carry, and how much loan does that payment buy?

The payment test is the debt-to-income ratio, your monthly debts divided by your gross monthly income. Take Fannie Mae’s rulebook, which a lender follows on any loan it plans to sell to Fannie. It caps the ratio at 50% for loans run through its automated system and at 36% (up to 45% with extra conditions) for loans a human underwrites. The housing payment inside that ratio includes principal and interest at the loan’s rate, plus taxes and insurance.

Translation: the lender found your maximum payment, then worked backward to a loan amount at that day’s rate.

Rates moved. The letter didn’t.

The math

Principal and interest on a $400,000, 30-year loan at 6.66% is about $2,571 a month. At 7.40%, the same loan costs about $2,770. That’s $199 more every month for the same house.

Flip it around. If $2,571 was your ceiling, at 7.40% it borrows about $371,000. That’s roughly $28,700 less loan, and your property taxes and insurance didn’t shrink to make up the difference.

Here’s the catch. The seller sees your letter, not your math. Bid up to the letter’s number, and if the lender reruns your file at underwriting, you find out the new limit after you’re under contract with an earnest money deposit on the line.

Shopping on a summer letter right now is questionable. Some buyers have room to spare because their income rose or their other debts fell. Most don’t know which group they’re in.

Do this

Call your loan officer this week and ask two questions. What rate did my pre-approval assume? What’s my maximum at today’s rate? Get the updated letter in writing before you write an offer.

Then set your price ceiling from the new number. Run it in our mortgage calculator at 7.40% and again a quarter point higher. The Fed meets October 27 and 28, and nobody can promise you which way that day goes. At 7.65%, that same $2,571 borrows about $362,000, another $9,000 off.

If the gap kills the house you want, there are two levers to price out. Discount points buy the rate down with cash at closing. An adjustable-rate loan starts lower, and we ran the year-8 risk on that trade in September. Compare lenders on our mortgage rankings before you pick either one.

The detail

Freddie Mac’s survey covers conventional, conforming 30-year purchase loans for borrowers with good or excellent credit and 20% down, and it comes out Thursdays at noon Eastern. Your quote can land above or below it. Our math is principal and interest only, on a standard 30-year fixed loan. For the bigger picture of what 7.40% does to a typical budget, see our look at the payment on a median home.

How Candid Yak makes money. Some of the products we write about pay us if you apply or sign up through our links. That never changes our verdict, our rankings, or the numbers in this article. We call a bad deal a bad deal whether it pays us or not. Some brands shown in our comparison tools are placeholder examples while we finalize partner agreements, and we label them as such.