One of the most important steps in buying a home is obtaining pre-approval for a mortgage. To shop effectively, and within your price range, you need to know what that price range is. For most home buyers, the amount they can spend is set by the lender they choose. By talking with a lender, or shopping around with a few lenders, you can determine what size loan you qualify for. This whole pre-approval process is something every buyer goes through if they are seeking a mortgage to buy a home.
It is easy to assume that once you have pre-approval, all you have to do is find a home to buy, sign some papers, get your money and purchase your home. But occasionally, buyers are given a nasty surprise when they go to get the mortgage. Even though they were pre-approved, the lender declines to give them the loan.
To avoid finding yourself in a situation where your mortgage is denied in spite of pre-approval, you need to understand the most common reasons why pre-approved buyers are denied.
Working as one of the top Re/Max Real Estate agents in Franklin MA, for the past 28 years, I can tell you what to avoid, and how you can move forward with the home buying process more confidently.
So how does this happen?
Change in requirements for the loan
There are times when lenders change the requirements they have for mortgages. For instance, a lender may have originally had a minimum credit score requirement of 650, but for whatever reason the company chooses to increase the minimum credit score to 680.
You may have gotten pre-approval under the original requirements, but when you go to actually get the loan you discover that the situation has changed. If you are unfortunate enough to encounter this kind of situation, the only real option is to seek financing from a different lender.
You take on additional debt
Your pre-approval is based upon your situation at the time you go through the pre-approval process. Part of the lender’s criteria for the mortgage is how much debt you have at the time of your application. Some buyers fail to realize that even small changes in their debt and their credit score can make their pre-approval status disappear.
If you go and buy a new car, or max out a credit card, your status changes with the lender. When you go to get the mortgage, you will discover that the pre-approval means nothing if you have accumulated enough debt to make you an undesirable risk to the lender.
You change careers
One of the major factors in your eligibility for a mortgage is your employment status. The lender needs to know that you are going to be capable of paying the mortgage, and will look closely at your employment history and income. If you decide to go and change jobs between pre-approval and buying the home, you may discover that the lender does not consider your new job, or your employment history, adequate for the loan.
There are also certain loans that have minimum employment history requirements, like an FHA mortgage. For an FHA loan, you need to have a consistent employment history for a period of at least two years.
A change in employment may not disqualify you for the mortgage, but it is best to talk with the lender at the pre-approval to make sure. If you change employers, but stay in the same field, it may not be an issue. But if you make a drastic change, you put yourself at risk of a denial for the mortgage.
A negative hit to your credit
Your credit score can change regularly based on a number of factors, like if you take out additional debt, or if you fail to pay your debts on time. Even though you have gotten pre-approval, if you do something that affects your score negatively, it may lead to a denial for your mortgage.
For instance, if you are carrying a balance on your credit card and you miss a payment, it may make your credit score go down. Depending on how far it goes down, the lender may consider you no longer qualified for the mortgage you were pre-approved for.
If you go to a lender that gives you pre-approval contingent on a bank appraisal, you may get in a situation where issues with the appraisal lead to a denial of the loan. The bank may discover something about the property or its location that makes it where you can’t get the loan.
As an example, FHA mortgages have specific requirements regarding gas stations. If a home is too close to a gas station, you can’t get an FHA loan. If the bank appraisal determines that there is a gas station in too close a proximity to the home, you won’t be able to get the loan.
While mortgage fraud is far less common than the above mentioned mortgage issues it does happen from time to time. The most common reason is when a borrower gives the lender falsified information at the time of their mortgage application.
Somewhere down the line the mortgage company or bank while doing their due diligence finds out the borrower was less than truthful about their current financial situation.
Protecting yourself from denial after pre-approval
Although some things may be beyond your control, it is possible to protect yourself from many of these situations. One of the most important things you can do when you go to buy a home is to educate yourself on how credit scores work, and make sure you avoid doing anything that can negatively impact your credit score or your loan qualification. An educated buyer will know not to take out any major debts, to pay all credit card bills on time and he or she will be aware of the requirements for the type of loan they are seeking, like an FHA mortgage.
Talk to your lender about how to maintain your pre-approval, and be disciplined in how you handle your credit. Be diligent about your employment, finances and credit to ensure that you can get the mortgage you need for your new home. Avoiding all of the reasons a mortgage is denied after pre-approval will allow you to keep your sanity and purchase the home you have worked so hard for.
Bill Gassett is a nationally recognized Real Estate leader who has been helping people move in and out of the Metrowest Massachusetts area for the past twenty eight plus years. Bill works at RE/MAX Executive Realty, one of the largest RE/MAX firms in Massachusetts.