Getting pre-approved for a mortgage is always a great idea. Not only does it help you identify how much you can afford in a home purchase, but it can also help you show sellers that you're a serious buyer and have the financial strength to make the purchase happen.
But just because you're pre-approved for a mortgage doesn't mean that you're in the clear just yet. Your lender is still diligently working after your offer was accepted to finalize your mortgage approval so the deal can close. Anything can happen from offer acceptance to closing that can cause the mortgage to be turned down.
So, what exactly can happen that can leave you with a rejected mortgage application, even after you've been pre-approved?
1. You Took Out Additional Loans/Credit Accounts
Your lender bases your ability to get approved for a specific loan amount on your current debt load, among other things. If you were approved for a specific loan amount based on the amount of debt you carried when you first applied, then any changes to your debt can throw a wrench in the mortgage approval process.
If you apply for a new personal loan or take out a couple more credit cards, you're adding to your current debt, which could be detrimental to your mortgage application. If the lender believes that adding extra debt to the pile will make you less able to pay your mortgage, you could yourself turned down for a mortgage.
2. The Appraisal Came in Low
Before your lender agrees to extend a certain loan amount to you to finance a home purchase, they're going to want to make sure that the home you agreed to purchase is actually worth what you're paying for it. If it's worth less, you could find yourself turned down for a mortgage. At the very least, the loan amount could be reduced to reflect the actual market value of the property.
Lenders order an appraisal after a purchase agreement has been signed because they want to verify the value of the asset that's securing the loan. In the event that you default on the mortgage, your lender will have the right to repossess the home and try to sell it at market value. If it's not worth as much as the loan they provided you with, they'll lose money.
If the appraisal comes in low, you have a couple of options. For starters, you can negotiate with the seller for a lower price. Or, you could try to come up with a bit more cash on your own to meet the lender where they're at and accept the lower loan amount. Otherwise, you may have to walk away from the deal altogether.
3. You Changed Your Job Status
Like your debt status, your job status plays a key role in your ability to afford a mortgage for a specific amount. Your lender is basing your mortgage approval largely on your income and employment status.
If you suddenly change jobs, take a pay cut, or become self-employed, that could throw a big wrench in the process. Your lender will have to start all over again using your revised employment status and income, and many times this could lead to a mortgage denial.
It's generally advised that all homebuyers who are waiting for final mortgage approval shouldn't make any changes to their employment status until well after final approval has been granted.
4. The Lender's Loan Requirements Changed
If your lender changed their lending guidelines some time between when you first applied for your mortgage and before closing, you could find yourself denied of a home loan. For instance, your lender might suddenly require a higher credit score than what you currently have, which could make it more difficult for you to get approved.
5. Your Credit Score Took a Hit
Speaking of credit scores, these numbers play a key role in your ability to secure a mortgage. Lenders usually won't work with borrowers with a low credit score. For traditional mortgages, it's customary for lenders to expect at least a 650 to 680 credit score. Any lower could make it more difficult to get approved for a mortgage.
If your credit score took a hit some time before closing, this could throw your application for a loop.
Whether you missed a couple of loan payments, took out more loans, maxed out on your credit card for the past couple of months, and were only able to make minimum payments on those cards, your credit score could take a hit, which in turn could be detrimental for your mortgage application.
Make sure to keep your financial status as strong as possible during the mortgage approval process and don't make any changes to your credit profile until you get the keys to your new abode!