The most critical step in purchasing your dream home is getting pre-approved before shopping around. This will ensure that the houses and condos you're looking at are affordable, within your price range and within what the lender will allow you to borrow.
However, even though prospective homebuyers get pre-approved for a mortgage before shopping for homes, there's no 100% guarantee they'll successfully get financing. Mortgages can get denied and real estate deals can fall apart — even after the buyer is pre-approved.
If you're aware of the pitfalls, you'll reduce the chance it can happen to you! Keep reading to learn the most common reasons mortgages get denied after pre-approval.
Top 5 reasons a pre-approved home loan could be denied
# 1: YOU CHANGED JOBS
The most common reason a home loan gets denied is due to a substantial change in employment. Many mortgage products require the borrower to have at least two years of employment history. If there are gaps, you'll be asked to explain why you were unemployed for a time — which is then subject to the mortgage underwriter's approval.
This doesn't mean you must stay in a job you hate just to buy a home. It's perfectly fine to change in employment, for example, if the new job is in the same or similar field. Let's say you're a software engineer and moved from one digital insurance company to another: as long as there is no drastic change in income, most mortgage underwriters will still give it a thumbs up. But if you go from being a software developer to a nurse, that might cause the lender to be more discerning and could deny the loan.
Expert Tip: Once pre-approved, talk to your loan officer about any possible employment change before making the leap. They'll advise whether or not there will be an issue.
# 2: YOUR CREDIT GOT PINGED — AND NOT IN A GOOD WAY
While this is not true that a perfect credit score is needed to buy a home, there are benefits to having a good credit score.
As a home buyer, you need to know your credit score when applying for a loan, and you should understand how credit scores change and impact which loan product you are offered.
A common reason a home loan might be denied is when a negative item on your credit sinks your score below a required benchmark. That's important because a lower credit score can affect the interest rate you're offered, which in turn can affect how affordable your monthly mortgage payment will be.
Expert Tip: Once you've been pre-approved, continue to pay every bill on time and regularly monitor your credit score. Your bank may have a free online tool to do this, with information derived from the three main credit bureaus: Experian, Equifax, and TransUnion.
# 3: YOU BOUGHT A BIG TICKET ITEM
Another reason you might get denied is if you took on additional debt — like buying a car or taking an expensive vacation after your offer on a home was accepted. A big purchase can have a substantial impact on a credit rating.
Expert Tip: After getting pre-approved, don't add big purchases to your credit cards — and even more important, don't take out another line of credit. This can have a massive impact on debt-to-income ratios and all that new, available credit will make your financial situation look risky.
# 4: THERE'S BEEN A CHANGE IN LOAN OR LENDER GUIDELINES
It's rare — but still possible — that loan requirements can change after a pre-approval is issued. Let's say that you applied for a home loan that allows a credit score of 620, and you're good to go because you have a score of 630. But then they move the goalpost, and now you need a credit score of 640. Or maybe they updated the acceptable debt-to-income ratios or how much money you need to have in reserve for closing. Your mortgage could be denied if they apply these changes retroactively.
Expert Tip: Ask your loan officer what the policies are and if your loan is subject to change anytime soon.
# 5: THERE ARE ISSUES WITH THE HOME APPRAISAL
It varies from lender to lender, but some will issue a pre-approval subject to a positive home appraisal.
That's because many factors can lead to a price renegotiation. An appraiser could ding the property if it's too close to a noisy freeway or alongside an abandoned building. While these are all workable issues within most loans, you may be denied if the home is too close to a gas station or other property holding stationary storage tanks containing flammable or explosive material.
Expert Tip: Be aware of issues that could create hiccups before bidding on a property you've otherwise fallen in love with!
Make sure your home loan doesn't get denied after pre-approval
The easiest way to keep a pre-approved mortgage on track is by behaving exactly as you did before getting pre-approved. Follow these post-pre-approval tips to stay the course:
- Avoid taking out additional lines of credit.
- Steer clear of big expenses that increase how much debt you're carrying.
- Don't deposit large sums into bank accounts without proving where the money came from. Also, don't withdraw large amounts of money.
- Keep saving just in case your closing costs are higher than expected.
- Provide your loan officer with all documentation as soon as requested.
Get clear to close
It can be disappointing for a pre-approved buyer to have their mortgage denied when they are so close to the finish line. But as you've just read, each reason a pre-approved mortgage could be rejected can be prevented — if you understand how to avoid making these mistakes.
If you're a prospective homebuyer with questions about home loan pre-approval, please reach out to one of our local loan officers to get started.
