Can You Be Denied a Mortgage After Being Pre-Approved?

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Can You Be Denied a Mortgage After Being Pre-Approved?

When you're in the market to buy a home, one of the first things you should do is get pre-approved for a mortgage. In fact, mortgage pre-approval is highly recommended to buyers, and the actual house hunting process shouldn't even start until the buyer has visited a mortgage broker or bank. 

There are certain benefits that pre-approval can provide a buyer. For starters, getting pre-approved for a mortgage can help you find out exactly how much you will actually be able to get approved for. When final mortgage approval rolls around, knowing how much you can get approved for will give you a clear picture about what price ranges you should be looking at. This can help you narrow your focus on the homes that are within reach rather than wasting your time on properties that you can't afford.

Another great reason to get pre-approved for a mortgage is that it will make you appear as a more competitive buyer in the eyes of the seller. This will be especially useful if you're in the middle of a multiple offer situation or bidding war. If you're competing with other buyers, you'll certainly want to stand out. Having a pre-approval letter will help you gain a competitive edge.

But one thing that a pre-approval is not is a guarantee that you will eventually be able to get final approval for a mortgage after your offer is accepted. Just because you were able to get pre-approved does not mean that you'll definitely get final mortgage approval. A number of things can happen that can throw off your mortgage application.

You can definitely be denied a mortgage after offer acceptance even if you've been pre-approved, and here are some reasons why.

You've Changed Jobs

A common reason why buyers are denied a mortgage despite getting a pre-approval is that they've changed jobs. Whether you took a new job somewhere else, took a pay cut, started a business, or even got fired, these are all things that will have a direct impact on your income, which will obviously have an effect on your ability to hold a mortgage. 

If your employment status and income changes, your mortgage broker will have to essentially start all over with the mortgage application and use the new set of numbers involved. While you might still be able to get approved, you'll at least delay the process. 

You've Applied For a New Loan

One of the more important factors that lenders look at when they assess whether or not a mortgage application will be able to support a mortgage is their debt-to-income ratio (DTI). If you add more debt to the pile, your DTI will increase. Lenders typically prefer to work with borrowers with a low DTI ratio, because they'll be less of a risk and be better able to manage their mortgage payments with lower debt loads.

But if you apply for a new loan and take on new debt, this will add more financial responsibilities to your plate. It's always important not to take out any additional debt before getting final mortgage approval. Instead, it's best to wait until after the mortgage has gone through.

Your Credit Score Took a Hit

When you take on new debt, your credit score may suffer a little. That's because the lenders associated with the new loans applied for will pull a "hard inquiry" on your credit report. This will leave a negative mark on your credit report and can cause your score to dip, even though it may only be temporary. 

Your credit score may also suffer if you've been neglecting to make payments on other loan products before getting final mortgage approval. Missing loan payments has a direct impact on your credit score. And if your mortgage lender notices a drop in your credit score, your ability to secure a mortgage may suffer.

The Home Appraisal Comes in Low

Once you've agreed to buy a home, the mortgage lender will want to have the home professionally appraised to make sure it's worth what you've agreed to pay for it. If the appraisal comes in low, you could have a problem getting final mortgage approval. The lender will likely not approve a mortgage amount for more money than what the property is worth.

Unless you're able to come up with the difference yourself, you could be out of luck. The only recourse in this situation would be to renegotiate with the seller for a lower price based on what the lender's appraiser believes the home is actually worth.

Final Thoughts

Getting denied a mortgage after you've been pre-approved can be a bit of a shocker. But there are usually very good reasons for mortgage rejection. When you're in the middle of escrow, it's essential that you don't do anything that could compromise your ability to get final mortgage approval.