What To Do If You’re Denied A Mortgage Loan After Pre-Approval

Being denied a mortgage after getting pre-approved can feel like a crushing disappointment. You probably thought everything was all set and you were ready to become a homeowner. Now, suddenly, you find out the bank doesn’t want to loan you money after all. Don’t panic. This happens more often than you might think. There are steps you can take to find out why you were rejected, fix any issues, and improve your chances of approval on your next application.

How Common Is It To Be Denied After Pre-Approval?

Industry data shows that around 8-12% of mortgage applications are denied. That includes both pre-approvals and applications submitted after you’ve made an offer on a house. However it’s difficult to pin down exactly how often borrowers are denied specifically after getting pre-approved.

Anecdotally, mortgage professionals say it’s relatively rare to have your loan fall apart between pre-approval and closing. But uncommon doesn’t mean impossible. Pre-approvals are issued based on limited information. The formal underwriting process examines your finances much more closely.

Reasons You Might Be Denied After Pre-Approval

There are a handful of scenarios that can cause your mortgage to be denied even if you already received preliminary approval from the lender

1. Your Debt Increased

Lenders calculate your debt-to-income ratio (DTI) to determine if you can afford your monthly house payment plus existing debts. If your DTI creeps too high, underwriters get nervous about your ability to handle the obligations. Taking on new debts like credit cards or car loans after getting pre-approved can push your DTI over the allowable limit.

2. Your Credit Score Dropped

Most lenders have a minimum credit score requirement, often around 620. Yours may have dipped below the threshold for approval. New negative information like missed payments or increased balances can lower your score quickly.

3. You Started A New Job

Switching employers shortly before closing on a mortgage makes underwriters worry about the stability and continuity of your income. They prefer to see at least two years in the same line of work.

4. You Made A Large, Unexplained Deposit

Big lump-sum deposits from unspecified sources are red flags to underwriters. They will want proof the money is really yours and not a short-term loan you’ll have to pay back later.

5. New Information Surfaced On Your Credit Report

Foreclosures, tax liens, judgments, and other derogatory items that post to your credit file after pre-approval can change a lender’s risk analysis of your loan.

6. Requirements Changed

Evolving market conditions or new regulatory guidance can cause lenders to tighten up their underwriting standards between pre-approval and closing. What qualified initially may no longer meet the new bar.

Don’t Despair! Here’s What To Do Next

Take a deep breath. Getting denied isn’t the end of the road on your path to homeownership. Arm yourself with knowledge about why your loan was rejected. Then make a plan to shore up any weaknesses so your next application sails through.

Step 1: Ask For Specific Reasons

By law, lenders have to disclose why they turned down your mortgage application if the denial was related to your credit report. But don’t wait around for a letter — pick up the phone! Your loan officer or broker wants your business. They’ll be happy to explain in detail what factors changed the risk profile of your loan.

Step 2: Target Any Weak Spots

Now that you know the specifics behind the denial, develop a strategy to fix them. For example:

• Pay down debts to improve your DTI
• Increase your credit score by paying bills on time and lowering balances
• Build up cash reserves with several months of mortgage payments
• Explain unusual deposits by providing records of where the money came from

Stay in touch with your lender for guidance on the best ways to strengthen your application.

Step 3: Be Patient

As eager as you are to jump back into home shopping, avoid applying for a new mortgage right away. Most issues take time to resolve fully. Opening several new credit accounts too quickly actually hurts your score. Let negative information age off your credit report. Demonstrate a pattern of responsible financial behavior over several months.

Step 4: Try Again With Confidence

Once you’ve shored up your weak spots, you’ll be ready to reapply for a mortgage, either with the same lender or a new one. This time, the underwriter will see improved credit, lower DTI, and a stable job history. That should green light your application for approval!

Does A Denial Permanently Damage Your Mortgage Chances?

No, absolutely not! Lenders understand situations change. Denials aren’t usually held against you down the road. In fact, underwriters like to see you took steps to correct any issues from a previous application. It shows you’re serious about getting approved.

The new lender will mainly judge you based on your current financial profile, not what happened months ago. So allow enough time to demonstrate positive change, then start fresh. With determination and diligence, a little denial won’t stop you from becoming a homeowner.

Why Did I Get Pre-Approved If I Was Just Going To Be Denied?

Excellent question! And one that’s easy to answer. Here’s the logic behind the pre-approval process:

• Pre-approvals provide a quick initial assessment using limited verification and documentation. The bar is lower at this stage.
• They’re intended to give you an idea of what you may qualify for. But pre-approval is not a guarantee of final loan approval.
• Underwriting takes a much deeper dive into your finances, so new information can surface. Standards also tend to be tighter.
• Think of pre-approval as a “conditional approval” pending full underwriting. So it’s not set in stone.

The main purpose of pre-approval is to show sellers you’re a serious buyer with the means to obtain financing. Most understand the limitations of pre-approvals. Situations changing between preliminary approval and closing is not uncommon.

Tips To Avoid Denial After Pre-Approval

While there are no absolute guarantees, you can take proactive steps to reduce the chances of unpleasant surprises derailing your mortgage between pre-approval and closing:

• Maintain or improve your credit score
• Pay down balances to keep credit utilization low
• Avoid applying for new credit accounts
• Make your expected down payment and closing costs are readily available
• Stick with your current employer and income sources
• Limit large expenditures on things like cars or vacations
• Keep an eye out for errors or suspicious activity on your credit report
• Communicate any significant changes to your lender right away

Essentially, you want to keep your finances stable and avoid surprises during underwriting. That will set you up for the smoothest path through to closing.

We Can Help You Achieve Homeownership

The mortgage professionals at ABC Company are experts at guiding borrowers through the loan process from pre-approval to closing. If your application was denied, we’re ready to help you identify solutions so you can qualify down the road. With personalized advice and support, we’ll help you join the ranks of happy homeowners. Contact us today to start a new conversation about making your dreams come true!