So you’ve been pre-approved for a mortgage, congratulations! You’re one step closer to snagging your dream home. But hold your horses, partner, because the journey isn’t over yet. Just because you’re pre-approved doesn’t mean you’re guaranteed a mortgage. Yes, it’s a bummer, but it happens more often than you might think.
Don’t fret, though. We’re here to shed light on the five most common reasons why pre-approved mortgages get denied, so you can avoid these pitfalls and sail smoothly towards closing day
1. Job Hopping: A Red Flag for Lenders
Lenders like stability, and frequent job changes can raise a red flag. Most mortgage products require at least two years of consistent employment history. If you’ve been bouncing between jobs, be prepared to explain the gaps and convince the lender of your current job’s stability.
Pro Tip: Before making any career moves chat with your loan officer. They can advise you on whether your new job will affect your mortgage approval.
2. Credit Score Woes: A Rollercoaster Ride
Your credit score is like your financial report card, and lenders pay close attention to it. A dip in your score after pre-approval can throw a wrench in your mortgage plans. Remember, a lower score can lead to higher interest rates, making your dream home less affordable.
Pro Tip: Keep those bills paid on time and monitor your credit score regularly Many banks offer free online tools to track your credit score, making it easy to stay on top of things.
3. Big Purchases: A Financial No-No
After getting pre-approved, resist the urge to splurge on a new car or a lavish vacation. These big-ticket items can significantly impact your credit score and debt-to-income ratio, making you a less attractive borrower in the eyes of the lender.
Pro Tip: Keep your spending in check and avoid taking on new debt. This will keep your financial situation looking healthy and increase your chances of mortgage approval.
4. Shifting Loan Guidelines: A Curveball from the Lender
While rare, loan requirements can change after pre-approval. Imagine this: you’re pre-approved with a 620 credit score, but the lender suddenly raises the bar to 640. Or maybe they adjust debt-to-income ratios or minimum reserve requirements. These changes can lead to a denial even if you were initially pre-approved.
Pro Tip: Stay in touch with your loan officer and inquire about any potential changes in loan policies that could affect your pre-approval.
5. Appraisal Hiccups: A Property Snag
Some lenders issue pre-approvals subject to a positive home appraisal. This means the property’s value must meet or exceed the purchase price. However, unforeseen issues like proximity to a noisy freeway or an abandoned building can lead to a lower appraisal, potentially jeopardizing your mortgage.
Pro Tip: Be aware of potential property issues before making an offer. This will help you avoid unpleasant surprises and ensure a smooth closing process.
Keeping Your Pre-Approval on Track: A Smooth Sailing Guide
Now that you’re aware of the potential pitfalls, let’s talk about how to keep your pre-approval on track:
- Resist the urge to take on new debt.
- Avoid major purchases that increase your debt burden.
- Don’t make large deposits or withdrawals without proper documentation.
- Continue saving for closing costs, just in case.
- Respond promptly to your loan officer’s requests for documentation.
By following these simple tips, you can increase your chances of a smooth and successful mortgage approval process. Remember, communication is key. Stay in touch with your loan officer and address any concerns they might have.
Getting pre-approved for a mortgage is a significant step towards homeownership, but it’s not the finish line. By understanding the potential roadblocks and taking proactive steps to avoid them, you can navigate the mortgage process with confidence and secure your dream home.
Negative item on credit report
Your application might be rejected if a negative item shows up on your credit report between the time you receive a preapproval and the beginning of the underwriting process. Any new negative items will make underwriters worry that you’re not a good lending risk.
Even if you’ve already been preapproved, negative items like bankruptcies, tax liens, charge-offs, missed payments, and new collection accounts can lower your credit score and lead to a denial.
While a perfect credit score is not necessary to obtain a home loan, you must nevertheless fulfill the minimum score requirements set forth by your lender. Lenders have different minimum requirements, but generally speaking, a mortgage lender wants to see a credit score of 620 or above.
The underwriter examines your debt-to-income (DTI) ratio—that is, the ratio of your total debt to your income—when you apply for a loan. The lower your DTI, the more likely you are to make on-time payments to a mortgage company.
If your DTI is near the lender’s E2%80%99s limit (typically 2036%), don’t add new debt to your credit profile when you apply for preapproval. Doing so can put you over the maximum and cause an underwriter to deny your application. To understand how this can happen, let’s look at an example.
Assume you earn $72,000 per year and have $25,200 in debt payments annually. In the event that you apply for preapproval through a mortgage lender with a 2036 DTI limit, your DTI would be 20355% of the total, which is just below the maximum. Increasing your debt by $1,500 would increase your DTI to 37. 1%, which would be over your lender’s limit.
Your eligibility for a home loan may also be impacted by changes in your income because your income is factored into your DTI calculation.
In the previous example, you were earning $72,000 annually and carrying a $25,200 debt load, which increased your DTI by 5%. If your debt stayed the same and your income decreased to $69,000, your new DTI would be 36. 5%. You’d be over the limit for any lender with a maximum DTI of 36%.
A home must be appraised before you buy it; this is a third-party evaluation that determines the property’s value. This step is required by your lender to make sure the house is worth enough to be used as collateral for the loan.
Even if you’ve already been preapproved, appraisal problems may result in the denial of your mortgage loan because most mortgage lenders won’t approve a loan for more than the value of the home. For instance, your application might be rejected if you want to borrow $150,000 but the appraisal shows the house is only worth $140,000.
Appraisal issues are frustrating for both the buyer and the seller. Fortunately, there are some things you can do after a low appraisal.
For lenders, a sudden job change is a major red flag. It could indicate a change in income or a change in reliable income. This is especially true if you switch from a salaried job to an hourly job. Your lender may be even more concerned if you move to a commission-based position with unpredictable paychecks.
Although job changes are concerning to mortgage lenders, they’re not grounds for automatic disqualification. A job change could help you lower your DTI and make you a more appealing applicant, for example, if you land a position with a higher salary.
To show that your work situation is stable, it’s also a good idea to stay in the same field, if at all possible. Moving from a help desk position to a systems administrator position is fine. But it’s likely to draw some strange looks if you leave the IT industry to give dog grooming a try.
Changed loan requirements or lender guidelines
Even if you follow all the procedures exactly, the lender’s final requirements for mortgage approval could change at any point between the time you receive the preapproval and the underwriter’s decision about whether to approve your application. If you don’t meet the new guidelines, you won’t get the mortgage approval with that lender.
Can you get denied after you’re been pre approved?
FAQ
Why was I preapproved and then denied?
Can a bank declined after pre-approval?
How often does an underwriter deny a loan after pre-approval?
Can a lender deny you after pre-approval?
What if I’m denied a preapproval?
Submit a new preapproval with your updated information, and the hope is that this time, you’ll find success. If you’re denied preapproval with a lender, know that there are lenders out there with more lenient criteria; you’ll just likely pay higher fees and interest rates.
Can a mortgage loan be denied if you’ve been preapproved?
Most mortgage lenders won’t approve a loan for more than the home’s value, so appraisal issues can lead to mortgage loan denial even if you’ve already been preapproved. For example, if you want to borrow $150,000 and the appraisal indicates the home is only worth $140,000, your application may be denied.
What happens if you’re denied preapproval with a lender?
If you’re denied preapproval with a lender, know that there are lenders out there with more lenient criteria; you’ll just likely pay higher fees and interest rates. If time is on your side, it pays to be patient and spend the next few months shaping up your finances and credit score before trying again.
Why was my loan preapproval declined?
There are a variety of reasons why your loan preapproval may have been declined by the lender. Some common reasons for denial could include: Your credit score is too low. You don’t have enough credit history. You’ve had a recent change in employment status or income. Your debt-to-income ratio (DTI) is too high.