Homebuyers

Pre-Approved Homebuyers Can Still Lose Out on Loans — Here’s Why

It’s news that no homebuyer wants to hear. You were pre-approved for a mortgage—only to be denied a home loan or approved for less than the amount you were expecting once the formal underwriting is completed. 

That can come as a surprising setback, particularly if you’ve already had an offer on a home accepted.  

Fortunately, lending experts say the most common red flags for denial after pre-approval, including changes to your job or credit score, can typically be avoided.  

“As long as you don’t quit your job, you don’t spend [all] your money and you don’t have a late payment, you should be good to move forward,” said Amber Ernst, a New American Funding sales manager based in Bettendorf, Iowa. 

If your circumstances change while you’re waiting on final approval, communicating with your lender is key. 

“Always let us know if anything comes up while we’re in process,” said Brenda Dintino, a New American Funding branch manager based in Tustin, Calif. That’s important whether “it’s good or bad.” 

Mortgage Denial Reason No. 1: Loss of income 

Adjustments to your income, whether due to losing or changing your job, are among the most common reasons for loan denials, mortgage professionals say. 

While it might be tempting to present your income and assets in the most favorable light possible, misstating financial information can harm your chances of getting final loan approval.

Being realistic about your budget at the outset of the homebuying process is key to determining how much home you can reasonably afford. 

To avoid surprises down the road, note that your lender may ask for income verification, such as tax returns, as part of the pre-approval process, Ernst said. 

Mortgage Denial Reason No. 2: Credit score trouble and new debt

If your credit score changes or you take on more debt, that may impact your ability to qualify for a mortgage.

A drop in your credit score before closing (maybe you defaulted on a loan payment, paid your credit card bill late, or were sent to collections) may change your eligibility or how much money you may be approved to borrow.  

Even if your income remains the same, taking on new debt, such as a car loan, can also negatively impact your debt-to-income ratio. This is one of the key measures that lenders assess in the mortgage approval process. That’s because lenders want to ensure you can afford to repay your mortgage in addition to your existing debt.

Another financial move to avoid? Spending your down payment.

Ernst worked with buyers who spent the funds allocated for their down payment in the middle of the loan process. Lenders want to know that you have these funds available to cover your down payment and closing costs.

Mortgage Denial Reason No. 3: Appraisal and condo approval problems 

A property appraisal that comes in lower than expected (or a home inspection that uncovers major issues) can also lead to loan denials or delays in the approval process. 

That’s because sellers may not accept less for their homes, but your lender may not want to loan you as much as the sellers are expecting. The good news is if you didn’t waive your appraisal contingency, you may be able to renegotiate the purchase price.

Similarly, if you’re buying a condominium, your lender will also need to review information related to the condo development and homeowners association. If financial or maintenance issues come to light, it can lead to a loan denial—even if you’re pre-approved. 

Mortgage Denial Reason No. 4: Mortgage rate changes and seller-side issues 

A change in mortgage interest rates before your loan is finalized can also affect your mortgage eligibility, resulting in a change in your loan amount or terms. That’s because a big change in rates can make monthly mortgage payments much lower or higher. This can affect how much you are eligible to borrow.

If your buying power is reduced, Dintino noted that there are still strategies to remain attractive to sellers, such as offering a larger down payment. 

Although less common, experts note that situations on the seller side can also lead to mortgage denials, since these circumstances may pose undesirable risk and uncertainty for your lender.

These include a property caught up in the probate process after the death of an owner or issues with the home’s title, including liens imposed against the property as payment for unpaid debt.

But while extraordinary circumstances do arise, the most common reasons for loan denials—namely income changes and debt problems—can often be overcome. 

Amber Ernst NMLS #406037

Brenda Dintino NMLS #239946