5 Top Reasons A Mortgage is Denied
The most important step in buying a home is getting both pre-qualified and pre-approved BEFORE looking at homes. The primary reason to get pre-approved for a mortgage before looking for homes is to ensure you’re looking at homes that are within the price range that you can afford.
However, just because you were pre-approved for a mortgage doesn’t mean it can’t get denied. The reasons for loan denial after approval are fairly common. The following are the most common reasons a mortgage loan can be denied after pre-approved.
1. Change of Employment
One of the most common reasons a mortgage is denied is because of a change of jobs. Depending on the type of financing a buyer is obtaining, each have certain requirements on the length of consistent employment. For example, a buyer obtaining an FHA mortgage has to have a sold employment history for two years. If there are gaps in employment, it is required that a written explanation is provided and is subject to the approval of a mortgage underwriter.
It’s important that, if you’re pre-approved, you ask your 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.
2. Additional Debt or Debts are Incurred
Another very common reason a mortgage is denied after a pre-approval is because a buyer takes on additional debt. 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.
3. Negative Item on Credit
Do you need perfect credit in order to buy a home? No…but there are specific credit score guidelines that each type of mortgage will have.
Another common reason that a mortgage is denied is due to a negative item on the buyers credit report. It’s important that you, as a buyer, know what your credit score is when you get pre-approved and have a strong understanding of how credit scores impact mortgages.
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.
4. A Change in Lender Guidelines or Loan Requirements
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, if a lender allows a buyer to have a 620 credit score and changes their requirement to a 650, this can lead to a mortgage denial if they choose to apply it retroactively.
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
5. 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.
Tips to Ensure Your Mortgage Does NOT Get Denied After Approval
The obvious tip is to just continue what you were doing before being pre-approved. Some additional tips are:
- Don’t increase your debts
- Don’t take on additional lines of credit, for example, buying a car
- Don’t withdraw large amounts of money from your bank accounts
- Don’t make any large deposits into your bank accounts without having proof as to where they came from
- Continue to save money in the event your closing expenses are more than originally estimated
- Provide all requested documentation to lender in timely fashion