Can a Lender Cancel Your Loan After Closing?

Closing on a mortgage loan is meant to be the finish line – you’ve signed all the paperwork, gotten the keys, and the loan funds have been disbursed. But in very rare cases, a lender may still be able deny or cancel your home loan even after you’ve closed. This nightmare scenario can leave buyers in a difficult position.

Let’s take a detailed look at whether lenders can actually cancel loans after closing under what circumstances it could happen and most importantly, how you can prevent it from occurring and be prepared if it does.

When a Lender Could Deny Your Loan After Closing

While exceedingly uncommon, there are a couple scenarios where a mortgage lender maintains the legal right to cancel your home loan after you’ve closed and even started moving in.

During the Rescission Period

Most mortgage closings trigger a 3 day “right of rescission” period after signing. This gives the borrower time to review the final loan terms and backing out if they’ve changed or you’re no longer comfortable with the deal.

Lenders know buyers have this right, so may delay actually funding the loan until the 3 days have passed. If your work or financial situation changes during that time, they may deny the loan rather than risk you being unable to repay.

Before the Loan Funds

Similarly, even if there’s no defined rescission period, the lender may not actually wire the mortgage funds to complete the transaction right after closing. There could be a delay of several days or even weeks in some cases.

If the bank re-verifies your employment eligibility and income prior to releasing funds and finds an issue, they may deny the loan rather than fund it.

Due to Fraud

Mortgage applicants must sign that all information submitted is true and accurate to the best of their knowledge. If a lender later detects fraud – such as falsified bank statements or tax returns – they can force the loan into default and even try to rescind the transaction.

Intentional mortgage fraud is rare, but could still cause a denial if found even after closing.

How Often Does This Actually Happen?

While lenders technically retain the right to cancel home loans after closing, property records show it is exceedingly rare in practice:

• Only 0.3% of all closed mortgage loans end up in rescission, according to 2012-2017 data from ATTOM Data Solutions. That equates to around just 1 in 330 loans.

• A large study by the University of Michigan found 0.04% of mortgages that underwent foreclosure had been rescinded by the lender after closing. Again extremely uncommon.

• Public record searches found only a handful of instances of post-closing rescissions over the past 5+ years relative to millions of mortgages originated.

So while possible in theory, the odds your lender actually reverses course after closing are very small. Still, understanding potential scenarios and how to avoid them is prudent.

Steps to Avoid Getting Denied After Closing

You’ve worked so hard making it to mortgage closing day. Don’t let last minute snags derail your home purchase. Here are tips to help prevent any post-closing loan denial:

Avoid job changes – Don’t switch employers or roles right before closing if possible. Stick it out a few more weeks until after funding.

Monitor credit reports – Ensure no new derogatory marks or accounts appear on your credit right before closing. Leave time for underwriting reviews.

Save closing costs – Have the full amount you need for down payment, closing costs, and reserves. Lenders will check again right before funding.

Inform lender of changes – If new accounts or credit applications are unavoidable, keep your loan officer in the loop in advance.

Review final terms – During the rescission period, double check the loan details haven’t changed since initial approval.

Wait to make big purchases – Hold off on large transactions until after funding, as they could alter debt-to-income ratios.

Confirm receipt of funds – Once funded, have your real estate agent verify the lender’s wire transfer went through as expected before letting your guard down.

What to Do If Your Mortgage Is Denied After Closing

If you receive the devastating news that your home loan has been rescinded days after closing, here are some options:

Find out exactly why – The lender must provide the specific reason your mortgage was denied in writing if you request it.

Discuss reinstatement with the lender – There may be a path to reversing the denial quickly if the issue is resolved.

Consider alternative financing – Research other mortgage lenders that may be able to fund the loan immediately.

Talk to a real estate attorney – An experienced lawyer can review your options and rights in the situation.

Ask the seller for patience – Explain the circumstance and ask if they can delay the sale to allow you to obtain new financing.

Be ready to walk away – If there’s ultimately no path forward with this property, be prepared to cut your losses to avoid further legal and financial hassle.

How to Prevent This Before You Even Start Looking

To help ensure you never end up in this nightmarish scenario, take steps to get your finances in pristine shape long before you even begin the home buying process:

• Pay down credit card and loan balances to reduce your debt-to-income ratio.

• Build up your credit score by consistently making on-time payments and keeping credit utilization low.

• Save up for a down payment of at least 10-20% if possible, plus closing cost and reserve funds.

• Stick with the same employer for at least 2 years so you have stable income sources.

• Avoid applying for or opening new credit accounts prior to getting approved.

• Only take on major new financial obligations like car loans once your home loan has funded.

Taking these proactive steps will put you in a strong position when mortgage shopping and minimize risks throughout the process. Remaining patient and avoiding last minute changes around closing can help provide peace of mind.

The Bottom Line

Getting denied for a mortgage loan – even after closing and getting the keys – is an outlier event that almost never happens relative to the millions of home loans originated annually. But understanding the circumstances that could still allow a lender to rescind the transaction is crucial. With pristine finances, consistent employment, and close coordination with your lender, you can avoid this nightmare scenario and rest assured your loan is safe once you sign the closing docs. But remain vigilant those first few days until all funds have transferred, and you can truly breathe easy in your new home.