Getting pre-approved for a mortgage can feel like you’re on the home stretch to owning your dream home. The homebuying process is already stressful enough! Despite the initial green light, certain factors can flip that “Yes” to a “No” when it comes to mortgage approvals. Before you start picking out paint colors, don’t get caught off-guard by this twist: not all pre-approvals lead to final approvals. Why would a lender change their mind after giving you that initial thumbs up?
Here are 7 frightening reasons why a mortgage is denied after pre-approval.
1. Credit Score Changes
Your credit score is the financial heartbeat of the home-buying process. Lenders keep a close watch on it. A drop in your score after pre-approval can set off alarms. Why? Because it often indicates new debt or financial instability. In fact, just a slight dip could sway lenders. According to the Consumer Financial Protection Bureau, a difference of 20 points could affect loan terms or approval. Protect your pre-approval by avoiding new credit lines and making payments on time, every time.
2. Job Change
Stability is key in the mortgage world. Your final approval could get denied for your mortgage if your job situation changes. Mortgage lenders want to see a steady employment status before approving a loan. A sudden job switch or company layoff could change how mortgage lenders feel about you. A mortgage company will be nervous about your ability to pay your mortgage if your employment status changes after the initial loan pre-approval. Slow and steady job employment wins the race to get fully approved for a mortgage.
3. Increase in Debt-to-Income Ratio
Think of your debt-to-income ratio as your financial balancing act. If you tip the scales by taking on more debt after your pre-approval, lenders may deny your loan approval. For example, it’s not smart to take out a small loan to renovate your kitchen while trying to get approved for a mortgage. Ideally, you have less debt and more income during the pre-approval process. Lenders want to see your income comfortably cover your debts with room to spare for a mortgage. Exceeding the preferred maximum DTI ratio, which often hovers around 43%, can spell denial.
4. Issues with the Property
Sometimes, it’s not you, it’s the house. If the property’s appraisal comes in under the asking price, the lender’s calculator starts to sweat. They’re in the business of smart investments, and overpaying isn’t in their playbook. When things like squatters occupying your future home occur, lenders are less likely to lend off the home. Banks don’t want to approve mortgages for homes that have issues. Additionally, major problems revealed during a home inspection can lead to a flat-out “no.” After all, a house with a shaky foundation doesn’t only scare you but also spooks the lenders.
5. Incomplete Application or Documentation
Dotting ‘i’s and crossing ‘t’s is never more crucial than in the mortgage process. Missing signatures can cause your pre-approval to get denied before the final approval. The same goes for incomplete fields on a mortgage application or missing documents. Stay organized to avoid getting your mortgage approval denied. Before submitting, double-check every document for completion and clarity.
6. Changes in Lending Regulations or Internal Policies
The lending landscape is as steady as a seesaw. Banks and institutions regularly tweak their rules. These changes could pull the rug out from under your mortgage application. The mortgage world can shift quickly. Yesterday’s approval might not withstand today’s policy update.
7. Undisclosed Liabilities
If there’s a skeleton in your financial closet, best to bring it out before the lenders find it themselves. An undisclosed debt can cause your mortgage to get denied after pre-approval. Don’t be that guy (or gal)! A recent financial hiccup can also scare lenders, leading them to deny your mortgage. They do one final sweep before closing. If they find something off, they may reconsider the deal.
Mortgage Denial After Pre-Approval
In the homebuying process, a pre-approval is only the first step. Keep your finances in order to make sure you get the keys to your new home. Especially if you’re trying to sell a house and buy a new one, mortgage denial can trainwreck the entire process. Until the papers are signed and the deal is sealed, maintain the status quo and stay in close communication with your lender. That’s your best bet to turn your pre-approval into a new home. Avoid these pitfalls so that your mortgage doesn’t get denied after pre-approval.