You have your mortgage pre-approval in hand so you think you are golden. All you have to do is find a home and you can get the necessary financing. Before you go spending the money before you have it, consider this. You can still get denied for a mortgage even after a lender preapproves you for it.
That letter the lender gives you stating how much money you potentially qualify for in a loan to give to the sellers isn’t a guarantee. If you change anything in your loan profile or the home doesn’t meet the lender/program’s standards, you could be without the financing you thought was a sure thing.
Keep reading to learn the top reasons borrowers get denied after getting preapproved for a loan.
After you apply for a mortgage, you have to ‘freeze’ your financial situation, especially your credit. If you go out and make a large purchase, open a new credit line, or pay bills late, you change what the lender already saw regarding your financial responsibility. The lender relies on the credit score they saw when they initially pulled your credit. If anything drastically changes that number, you could lose your approval.
The best thing to do is pay your bills on time, don’t apply for any new credit, and don’t make any large purchases. In other words, leave your credit as is so that the only thing your credit score has to do is move up with your positive credit history and your decreasing utilization ratio as you pay your bills down.
Making a large purchase doesn’t only put your credit score at risk; it also increases your debt ratio. The lender preapproved you based on your current debts and income. From those two numbers they determined your debt ratio. If you received a pre-approval, your debt ratio fell in line with their guidelines.
If you turn around and make a large purchase, such as a car or furniture, you suddenly increased that debt ratio. This means more of your income is committed to your existing debts, which leaves less room for the mortgage payment and decreases your disposable income. Just one purchase could turn your approval into a denial.
Changing jobs doesn’t always mean you will lose your loan approval, but it can put it at risk. When you apply for the pre-approval, the lender bases it on your current employment situation. If you decide to change jobs, it’s important to discuss it with your loan officer.
Typically, an employment change can change an approval into a denial if the new job is in a different industry or if your income drops. Here are a few examples:
Joe works as a banker. He applies for a mortgage pre-approval and gets the approval. It takes him 3 months to find a home. In the meantime, he changed jobs, working for a different bank. His income is a little higher and the job is a little better than the one he had at the previous bank, but it’s still a banking position. Joe probably wouldn’t lose his approval because he remained in the same industry and his income increased.
John works as a banker too. He applies for a mortgage pre-approval and gets approved. It takes John 2 months to find a home, but one month ago, he changed jobs and became a dog trainer. John’s income is about the same, but it’s in a completely different industry. The lender may look at John as high risk because his job change put him in a different industry in which he has no experience to prove that he can succeed at it.
As you can see, employment changes can go one way or the other. Always discuss the change with your loan officer to determine if it could damage your approval.
Along the same lines as employment changes are changes in income. You could lose your approval if you have a decrease in income. This usually happens when a borrower changes jobs, typically in a different industry. They decide they need a change and that the decrease in income is worth it. While change is good, waiting until you have a final approval and close on your home purchase is the better option. Your lender can’t take away your loan after you close on it just for changing jobs. But if you change before you close on the loan and your income decreases, it could be grounds for a loan denial.
The best thing to do is keep your financial life status quo. Don’t make any unnecessary changes. If you have any changes you have to make, talk to your loan officer to see how it may affect your pre-approval or final approval.