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Top 5 Reasons a Mortgage is Denied After Pre-Approval!
November 1, 2019 | Posted by: Gian Manalastas
Top 5 Reasons A Mortgage Is Denied After Pre-Approval
One of the most important steps to successfully purchase a home is to get pre-approved for a mortgage before shopping for homes. The primary reason to get pre-approved for a mortgage before shopping for homes is to ensure you’re looking at homes that are within the price range that you can afford.
Even though a buyer will get pre-approved for a mortgage before shopping for homes doesn’t mean there is a guarantee they will successfully obtain the financing. Certainly the hope is that if a lender pre-approves a buyer that the buyer will successfully obtain the financing, however, it’s possible a mortgage can get denied even after pre-approval.
A mortgage that gets denied is one of the most common reasons a real estate deal falls through. When a buyer’s mortgage is denied after pre-approval, it’s in most cases the fault of the buyer or the lender that pre-approved them.
Many of the reasons a mortgage is denied after pre-approval are actually fairly common. Below you will find the most common reasons a mortgage is denied after pre-approval and if you’re aware of what they are, you’ll greatly reduce the chance that your mortgage is denied even after a pre-approval!
Change Of Employment
One of the most common reasons a mortgage is denied is due to a change in employment. If you are still in probation with your new employer during your closing, the chances of your mortgage closing is slim to none. Depending on the type of financing a buyer is obtaining, there are certain requirements for length of consistent employment. For example, FHA mortgages require a buyer to have solid employment history for two years. If there are gaps in employment history, they require a written explanation which is subject to the approval of a mortgage underwriter.
A change in employment maybe acceptable in some cases if it’s in a similar field. For example, if a buyer who is a nurse switches hospitals but remains a nurse, as long as there was not a drastic change in income, most lenders will be OK with this change of employment.
Recently while selling a home in Toronto, On, a buyer switched employers after getting pre-approved and completely switched career fields, which led to the mortgage being denied.
It’s important that a buyer who is pre-approved asks their mortgage consultant about a possible employment change before making the change. In most cases, a top mortgage consultant will be able to predict whether there will be an issue with ultimately obtaining the financing or not.
Negative Item On Credit
A very popular home buying misconception is that you need perfect credit to buy a home. This is not true, however, there are specific credit score guidelines that each type of mortgage will have and also guidelines that each lender will have.
One of the most common reasons a mortgage is denied is because of a negative impact to a buyers credit score. It’s extremely important that a buyer knows what their credit score is when they get pre-approved and have a strong understanding of how credit scores impact mortgages.
A buyer who has a credit score in the low 600’s needs to be extra careful once they get pre-approved that they have no negative impacts on their credit. Certainly a buyer with scores in the 700’s should be careful as well, however, there is obviously quite a difference between a 610 and 710 credit score.
Bottom line, if you have been pre-approved, continue to make sure you pay bills on time and also monitor what your credit score is. Finding out a week before a target closing that your loan has been denied can be devastating!
Additional Debt(s) Are Incurred
Another very common reason a mortgage is denied after a pre-approval is because a buyer takes on additional debt. Ask any experienced real estate agent if they’ve had any situations when their buyer takes a loan out for a brand new car after they’ve had their offer accepted on a home. The chance that the real estate agent has is pretty high.
It’s important that when buying a home and you’ve been pre-approved that you don’t add any additional debts or credit lines. This can have a huge impact on debt to income ratios and ultimately can lead to a mortgage that is denied.
Loan Requirements Or Lender Guideline Changes
It’s possible that after a pre-approval is issued that a lender or mortgage product may experience changes to their requirements and guidelines. For example, there's a recent change in the underwriting that requires all applicants to take a stress test where applicants have to qualify with a qualifying rate. This resulted in reducing the overall amount that an applicant can borrow.
Other changes to loan requirements or lender guidelines that could lead to a mortgage being denied after pre-approval may include;
Debt to income guideline changes
Amount of reserves (savings) required of buyer
Mortgage Insurance Premium Increase
Issues With Appraisal
It varies from lender to lender, however, some lenders will issue a mortgage pre-approval for a buyer subject to a satisfactory bank appraisal. The reality is that there can be issues with the bank appraisal. Many of the issues with a bank appraisal are fairly common.
Recently during the sale of a home in Irondequoit, NY the banks appraiser cited a gas station that was in close proximity to the subject property. This particular buyer was obtaining an FHA mortgage which did not allow for a gas station to be within a certain distance, which ultimately led to the mortgage being denied. Fortunately, the buyer was able to switch types of financing to a conventional mortgage product which didn’t have an issue with the proximity of the gas station.
Tips To Ensure Your Mortgage Is NOT Denied After Pre-Approval
Obviously this is only one example of an issue with a bank appraisal that led to a mortgage being denied. There are many other reasons a mortgage is denied after pre-approval because of an appraisal issue.
A common question that is asked by home buyers is, “How can I ensure my mortgage is not denied.” An excellent way to ensure your mortgage isn’t denied after a pre-approval is to continue to do what you did prior to getting pre-approved. The majority of mortgage lenders do an excellent job to ensure most of their pre-approvals actually make it to the closing table.
Some additional tips to help ensure your mortgage is not denied include;
Don’t take on additional lines of credit
Don’t increase your debts
Don’t make any large deposits into your bank accounts without having proof as to where they came from
Don’t withdraw large amounts of money from your bank accounts
Continue to save money in the event your closing expenses are more than originally estimated
Provide all requested documentation to lender in timely fashion
It can be devastating for a pre-approved buyer to have their mortgage denied at the last minute. The above top 5 reasons a mortgage is denied after pre-approval can be prevented. It’s important to understand why mortgages get denied after pre-approval so you do not make these mistakes.
Prior to making any decisions that could impact your financial situation, consult with either your mortgage professional or real estate professional. In most cases this can prevent you from making a decision that could impact whether or not your mortgage is denied.
The above article “Top 5 Reasons A Mortgage Is Denied After Pre-Approval” was provided by the Keith Hiscock Sold Team (Keith & Kyle Hiscock).