Article Excerpt
It's possible to be pre-approved for a mortgage, then denied during underwriting. Find out why this may happen and what you can do if it does.
Buying a home is one of the largest purchases most people will ever make. Mortgage loans provide homebuyers with most of the money they need to complete the purchase. Lenders take a risk every time they lend money to someone. They have developed guidelines for assessing the risks associated with a new loan, and they want to make sure that every prospective borrower meets their requirements.
Pre-approval for a mortgage loan is a great way to demonstrate to sellers that you are ready, willing, and able to close the deal. Getting pre-approved for a loan only means that you meet the lender’s basic requirements at a specific moment in time. Circumstances can change, and it is possible to be denied for a mortgage after pre-approval. If this happens, do not despair.
Read on to learn more about what will get you denied for a mortgage, and what you can do next.
What Are Some Reasons For Being Denied a Mortgage After Pre-Approval?
After you receive a pre-approval letter from a mortgage lender, you still have to go through the underwriting process before the loan receives final approval. A pre-approval is really a “conditional” approval. If your financial profile changes between a pre-approval and underwriting, you may lose the ability to get a mortgage with that particular lender.
The underwriter will take a close look at your credit history, debt-to-income ratio (DTI), and other aspects of your finances. This is likely to be a much closer inspection than during the pre-approval process.
The underwriter will also have access to information that wasn’t available during pre-approval because it hadn’t happened yet. Many situations in which a prospective homebuyer is denied for mortgage after pre-approval result from changes in the homebuyer’s finances or other new information.
Debt Increase
Most lenders want to see a DTI of no more than 36%, meaning that your total monthly debt payments are no more than 36% of your monthly income. A higher DTI might suggest that you are too much of a risk since you already have a rather substantial debt load.
Pre-approval is based, in part, on the conclusion that your DTI is within the lender’s acceptable limits. If you take on more debt after receiving pre-approval, but before closing on the loan, your DTI will go up, and the underwriter will not be happy.
Credit Report Information
New information can appear on your credit report at unpredictable times. Negative information that appears after pre-approval can make an underwriter take a closer look at your application, especially if it reduces your overall credit score.
Change in Income
Much like an increase in debt, a reduction in income is a red flag for underwriters. This may occur through no fault of your own. For example, your employer could lay you off shortly after you receive pre-approval from a lender.
Change in Job
Changing jobs during the time between pre-approval and closing can be a cause for concern among underwriters. It can make an underwriter worry about the consistency of your income.
This is not to say that you should put your career on hold while you wait to get a mortgage. If you have an opportunity for a promotion within your company, or a job offer in your field with a substantial pay raise, the benefits of the new job could outweigh the underwriter’s concerns. Moving into a completely different line of work, however, can make your work situation seem unstable.
Unusual Financial Activity
Underwriters look for financial stability and reliability when assessing how risky your loan would be. Sudden, unusual, or unexplained financial activity after pre-approval can cause problems. This is not the time to make large purchases, such as a new car. It is also not the time to make large deposits into your bank account with no explanation. Even if the money is a gift or inheritance, the underwriter will worry that you’ve taken on new debt unless you can document the source of the money.
Change in Lender or Loan Requirements
You may end up pre-approved for a mortgage but then denied because of circumstances beyond your control. Requirements for mortgage loans can change, and lenders may adjust their underwriting guidelines. You could find that your situation met the lender’s requirements when you received pre-approval, but do not meet the new criteria.
Does Getting Denied For a Mortgage Hurt Your Credit?
According to the credit bureau Experian, a mortgage denial will not lower your credit score by itself. Information about the application, however, will be available to any creditor making a hard inquiry. Additionally, applying for a mortgage across with multiple lenders will only ding your credit score between five and fifteen points for a short amount of time.
Do Multiple Mortgage Applications Affect Credit?
What do I do if my Application is Denied After Pre-Approval?
If you have been denied for a mortgage after getting pre-approval, your first instinct might be to apply for a mortgage with another lender as soon as possible. That is probably not the best course of action. You need to understand why the lender rejected your application. If possible, you need to address the issues that led to the rejection.
Ask Your Lender Why
Communication is usually the best place to start. Your lender made a business decision. It wasn’t personal, so don’t be shy about asking them questions. The lender’s business is making loans. If there’s something you can do so you meet their criteria and they can lend you money, they’ll want you to know it.
What you do next will depend on what the lender tells you. Here are some possible courses of action:
Build Some Cash Reserves
Lenders like to see that you have some cash on hand to cover debts and other expenses. You might need to build your bank account up a bit before you try again.
Pay Down Debt
One of the biggest reasons people get pre-approved for a mortgage but then denied final approval is because their DTI turns out to be too high. If your DTI is close to the upper limit, something might have happened after pre-approval that pushed it over the line. Getting it back within the lender’s guidelines might be all you need to do
Supplement your Income
There’s more to this than just “try to make more money.” That’s good advice for anyone. In your situation, a little extra income could go a long way towards improving your chances of approval. If you have the opportunity to pad your income, whether it’s by taking on more shifts, closing more sales, or working a side hustle, consider it an investment in your future home.
Improve Your Credit score or Fix Your Credit Report
The lender might have denied your application because your credit score dropped below the minimum guideline. Building your credit score back up could be necessary before you try again for a mortgage.
On the other hand, you might have errors on your credit report that make you look — incorrectly — like too much of a risk. You can dispute inaccurate information and request corrections.
Wait a While
You might just need time to demonstrate financial stability and reliability. If you have only recently entered the workforce, or you recently changed jobs or careers, lenders want to see that you have had 24 consecutive months of income.
You can also ask about government-backed programs like Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) loans. These programs often provide financing for homebuyers who do not meet the criteria for a conventional mortgage.
More Questions? We Have Answers!
The homebuying process can be stressful, even under the best of circumstances. It doesn’t have to be stressful though. The home mortgage professionals at the Wood Group of Fairway are here to help you understand your options and find the best mortgage for your situation. Get started on your free pre-approval today by answering a few questions!
