Why are Mortgages Denied after being Pre-Approved?

Purchasing a home has many parts in the process, and unfortunately, there are several aspects which are misunderstood by buyers. When you begin your house hunt, it should be on the internet, but not for homes. Rather, you should be doing your homework in comparing lenders. You can either apply directly through a bank or mortgage company, or, go through a mortgage broker. Regardless of how you proceed, you should always compare rates and terms. These will vary among lenders and it’s also important to keep in mind that interest rates change daily.

Why are Mortgages Denied after being Pre-Approved?

The home loan application process begins with a pre-qualification, which is more-or-less a cursory look at your finances and work history. This is to give you an idea of how much financing you can obtain, but, it’s usually a ballpark figure. Once you are pre-qualified for a mortgage, you then have to be pre-approved. Notice the structure of the term — you are only “pre” approved, but not actually approved for a home loan.

A lender prequalifies you for a mortgage by asking for information about your employment, income, debts and down payment amount. The lender sends a prequalification letter if it’s determined that you could qualify for a mortgage. Expect the letter to include several disclaimers. For example, your letter may say that your mortgage approval is subject to a review of your credit history, as well as your co-borrower’s. Disclaimers make the prequalification letter nonbinding, so the lender isn’t obligated to approve a mortgage for you. —The Nest

The pre-approval process is a more in-depth look at your finances, meaning your income and debts, your credit history and score, as well as your employment history. This allows the lender to give you an amount that you’re able to borrow. Of course, even this will come with certain provisions, such as down payment and the appraisal. When you have a purchase offer accepted by the seller, the deal isn’t yet done. There are common reasons home loans are denied, even after you are pre-approved for a mortgage:

  • Changing jobs, particularly, career changes. Lenders generally require you to have at least two years at your current place of employment to qualify for a home loan. However, if you change jobs, that could or could not be a problem. For instance, if you change employers but stay in the same field, it probably won’t cause you to be denied. If you change careers, though, that’s a common reason mortgages are denied after being pre-approved.
  • Adding or maxing-out lines of credit. Prospective homeowners often get very excited about starting a new chapter in their lives. This can easily lead to buying things such as new furniture and decor. Doing so, though, means a change to the borrower’s debt-to-income ratio and a changed DTI can lead a lender to deny a mortgage.
  • Clearing out your bank account. It’s not uncommon for lenders to require a down payment. It can be under 5 percent or near 10 percent, but regardless of the amount, your lender will keep an eye on your bank account. Your cash position can be quite important, so, be sure you understand your lender’s guidelines.
  • New negative credit entries. While you might have good or excellent credit now, it can be affected by new negative entries. It doesn’t even have to be accurate, as some 40 million credit files have errant items, according to CBS News. Lenders generally run a second credit check, known as a “soft credit check” just days before closing.
  • There are appraisal issues. Though an appraisal is an optional step, lenders typically have these conducted to assign market value to a home. If the home appraises for a higher amount than the agreed purchase price, that’s a good thing. However, if the appraisal comes in low, your home loan could be denied.