Getting denied after pre-approval isn't common, but it happens more often than you might think. Pre-approval is granted based on your financial circumstances at the time you apply. But if those circumstances change between the time you apply and make an offer on a home, the lender reserves the right to deny your application. If you haven't made any significant changes within that period, then you won't have anything to worry about. But if new information comes to light that puts you at a greater risk of default, you could be denied.
- Change in Employment
- New Debts Incurred
- Changes in Your Credit Report
- New Lender Requirements
- Appraisal or Inspection Issues
Change in Employment
The most common reason for getting denied after pre-approval is a change in employment. A sudden change in employment is a major red flag to lenders, especially if it negatively impacts your income. Lenders want to see consistent employment and may require a certain number of years at a current job or in a specific field. For instance, FHA loans require at least two years of consistent employment history.
If you recently got a raise or transferred to a better position in the same industry, you likely won't experience issues. But if you were recently let go, decided to take time off, or switched to an entirely new field, it may be cause for denial. So, it's typically best to wait until after you sign on the dotted line to make any dramatic life changes.
New Debts Incurred
Incurring new debts between the time you applied and completed the mortgage is another issue that may lead to denial. Lenders want to see that you're responsible with your spending and won't have issues covering the mortgage payment.
Suddenly adding new loans and other tradelines may make you seem like a riskier borrower, especially if it's a significant amount. Small increases in your overall debt likely won't lead to denial. But the lender might get cold feet if you suddenly financed a new car or took out a large personal loan.
Changes in Your Credit Report
New changes in your credit report can also lead to a loan getting denied after receiving pre-approval. Perhaps you had a positive credit history when you first applied but missed a few recent payments that negatively impacted your score. Or maybe you applied to too many other lenders and were hit with a series of hard inquiries. Most lenders have a minimum credit score requirement. So, if your score takes a hit, leading it to dip below the threshold, it may be cause for concern. Those who are right on the cusp should be particularly vigilant about any changes to their credit report during this time.
New Lender Requirements
It's also possible that the lender may change their requirements between the time you applied and finalized the loan, which makes you no longer eligible for a mortgage. For instance, maybe they suddenly increased their minimum credit score requirements from 620 to 650, and your score is below that. They also may change their debt-to-income ratio requirements or the number of savings borrowers must show. While this is unlikely to happen with smaller, local banks and credit unions, larger banks might make policy changes that impact your eligibility.
Appraisal or Inspection Issues
An issue with the appraisal can also result in a lender denial. Lenders want to know that the property is worth roughly what you're offering the seller in the event they have to foreclose on the home and sell it to mitigate their loss. So, if the inspection reveals issues with the property or the appraisal comes back significantly lower than what you offered, the lender may choose to deny the loan. However, that will also save you from making a bad investment.
Although being pre-approved for a mortgage is great, you can still get denied for a loan after pre-approval if the circumstances change. Certain factors that may lead to a denial are beyond your control. But try to avoid any sudden employment changes or taking on any additional debts if you want the underwriting process to go smoothly.