Mortgage pre-approval is one of the preliminary steps in the home-buying process. This is when the lender looks at your financial situation to see if you are qualified for a home loan, and also to determine how much they are willing to lend you. Buyers typically do this before they start house hunting.
Many first-time buyers believe they are “home free” after being pre-approved for a mortgage. They think nothing can go wrong once they have a pre-approval letter in hand. But that’s not the case at all. In reality, you can still be denied a mortgage loan after being pre-approved by a lender. It happens all the time.
5 Things That Can Go Wrong After You’ve Been Pre-Approved
Here are five things that can derail your mortgage loan even if you’ve been pre-approved by a lender. If you can avoid these types of issues, you’ll be more likely to receive a “clear to close” green light from the underwriter.
1. You have insufficient documentation.
Mortgage lenders request a variety of financial documents when approving borrowers for home loans. These include W-2 forms, tax returns, bank statements, pay stubs and the like.
But they may not request all of these documents up front. In some cases, the mortgage lender will issue a pre-approval based on partial documentation. Later in the process, the underwriter might request additional documents.
In the best-case scenario, this will only lead to a slight delay in the mortgage approval process. In the worst-case scenario, it could cause you to be denied a mortgage due to insufficient documentation — even after you’ve been pre-approved for a loan.
You can reduce the chance of document-related problems by rounding up your documents in advance, and by staying in close contact with the lender before and during the underwriting process.
2. You don’t have enough cash reserves.
These days, a lot of mortgage lenders are requiring borrowers to have additional “cash reserves” in the bank, prior to closing. These are funds set aside to cover the first few monthly loan payments. Borrowers can be denied a mortgage after being pre-approved if the underwriter determines they have insufficient cash reserves.
As a borrower, you should be proactive and ask about these requirements up front. It could help prevent unpleasant surprises down the road.
3. You made a large purchase, or purchases.
Being pre-approved for a mortgage loan doesn’t mean you can go out and make large purchases. Spending a lot of money on a car or vacation could reduce your assets to the point you get denied a mortgage.
The lender will likely review your bank account status at the time you apply for the loan. They do this to determine how much cash you have on hand for your down payment, closing costs, and other housing-related expenses. They will base their pre-approval on the amount of money you currently earn, and the amount you have in the bank.
There’s a good chance they will verify your savings again, after you’ve been pre-approved for a home loan. Most lenders verify assets just before closing, to ensure the borrower’s financial situation has not changed significantly. So it’s important that you keep your financial situation as “static” as possible, between the pre-approval and the final closing.
4. You’ve taken on additional debt since pre-approval.
Debt-to-income ratios, or DTIs, have become increasingly important during the mortgage process. This ratio is basically a comparison between the amount of money you earn and the amount you spend to cover your monthly debts.
Having too much debt can hurt your chances of getting a home loan. These days, most lenders require borrowers to have a total debt-to-income ratio no higher than 43%.
This is another factor that can cause you to be denied a mortgage loan after pre-approval. For instance, if you rack up a bunch of new credit card debt shortly after being pre-approved, it could put your debt-to-income ratio above the lender’s cut off point. If this happens, the underwriter may inform the lender that you are no longer qualified for a mortgage under their underwriting guidelines.
The good news is you have some degree of control over this. To prevent these types of problems after pre-approval, avoid making major purchases or opening new lines of credit. Keep those credit cards in your wallet until you receive a final approval.
5. Your income or employment situation has changed.
The mortgage lender will pre-approve you based on your current income and employment situation. However, if your status changes sometime during the underwriting process, it could cause you to be denied the loan.
You have less control over this factor than the ones listed above. You can control your purchases and credit card usage, for the most part. But your income situation might be beyond your control. Just do everything within your power to keep your income and employment situation static after you’ve been pre-approved.
Here’s what you need to take away from this lesson:
- Pre-approval can be a helpful step in the mortgage process. It allows you to narrow your search to homes that fit your budget. It also makes sellers more inclined to accept your offer. But it’s not a guarantee of financing.
- Pre-approval is not a lending commitment. It is the lender’s way of saying they will likely give you a loan for a certain amount, as long as your financial situation doesn’t change prior to closing.
- Having a pre-approval letter does not mean you are home free. Things can still go wrong before the final closing, causing the mortgage to be denied.
- Your goal as a borrower is to maintain the status quo as much as possible.
Please note that this list is not exhaustive. There are other things that can go wrong during the underwriting process. This article simply covers some of the most common problems.