If you plan to make a home purchase sometime in the near future, one of your first steps should be to get pre-approved for a mortgage. Speaking with a mortgage professional will help you determine how much you can actually afford to spend when buying a home and how much of a mortgage you may be able to get approved for. Not only will a mortgage pre-approval help you focus on the homes that fall within your price range, it will also help sellers perceive you as a serious, qualified buyer.
But one mistake that many buyers make is assuming that a pre-approval is equal to final mortgage approval. While you may have been pre-approved for a home loan of a certain amount, that doesn’t necessarily mean that you will definitely be able to secure a final mortgage approval after you’ve made an offer on a home.
This is a sobering fact, but it’s one that all buyers must realize. The truth is, there could be any number of reasons why a mortgage is rejected despite pre-approval, and here are just a few.
Change in Jobs
Your initial mortgage application was based in part on the status of your employment at the time you first applied. If you happen to change jobs after the fact, that can throw a wrench in the application process. In fact, this is one of the more common reasons for mortgage denial after pre-approval.
Many mortgage programs require that borrowers have a steady job for a certain period of time. If that suddenly changes, the mortgage application may be in jeopardy. There may be exceptions if the job change is in the same field with the same – or higher – salary.
However, if the job change is in a completely different industry and the job status is not considered full-time or permanent, or if you quit your job to become self-employed, many lenders might have an issue with this fact and may deny a mortgage application.
If you decide to apply for a new loan after you initially apply for a mortgage, you could wind up without a home loan. Another important factor that lenders look at when assessing a borrower’s financial health before approving a mortgage is debt load. More specifically, lenders look at how much debt load a borrower is carrying in comparison to their income.
The pre-approval will be based on the amount of debt that was being carried at the time of application. If that debt load suddenly spikes as a result of additional loans being taken out, the chance of mortgage denial is a lot higher. Whether you apply for a car loan, personal loan, or any other that adds more debt to the pile, you could be putting your mortgage application in jeopardy.
The home that you agree to purchase will be assessed by a professional appraiser appointed by your lender to make sure its current value is in line with the purchase price. If the appraisal comes in lower than the agreed-upon purchase price, you could have trouble getting final approval for a mortgage, at least for the amount you requested.
In these cases, you may have to come up with more money in order to bridge the gap between the purchase price and the amount your lender is willing to loan you. If you can’t, you could risk your mortgage being denied.
Drop in Credit Score
Your credit score plays a key role in your ability to secure a mortgage, and if that number drops for whatever reason, your mortgage could be denied. There could be any number of reasons for a hit to your credit score, such as missed payments or taking on additional debt. Whatever the case may be, a negative hit to your credit score could risk a rejected mortgage application.
Change in Lender Requirements
It’s possible for lenders to make changes to their guidelines or criteria for mortgages after you’ve been pre-approved. For instance, lenders may increase their credit score requirements, change their debt-to-income ratio criteria, or increase the amount that they require their borrowers to have in savings. Whatever the changes may be, this could put you in a potential position to lose out on a mortgage.
The Bottom Line
Clearly, there are many instances that could jeopardize your mortgage application, even after you’ve been pre-approved. Sometimes you could even be denied for a mortgage without any of the above-mentioned situations occurring, especially if a lot of time elapses between pre-approval and final sale. The point that all buyers should note is that a pre-approval does not guarantee a final mortgage approval, though it certainly is a step in the right direction.