Pre-approval is an essential, responsible first step when you’re ready to buy a home. If you’ve been pre-approved and you’re ready to look for homes, you’re on the right track. But it’s easy to mistake a mortgage pre-approval for a guarantee. After all, they spent all that time painstakingly going through your credit score, finances, debts, and assets. Even though pre-approval is a comprehensive, essential first step in buying, it isn’t a done deal. A mortgage can be denied after pre-approval, and is one of the main reasons that property sales fall through. Want to avoid denial after pre-approval? Keep your financial situation consistent, and understand what your pre-approval is based on. This isn’t the time to buy a new car, switch careers, or finance a major purchase. If your finances change, a pre-approved mortgage could be denied when you’re ready to close on a home.
What is mortgage pre-approval?
Mortgage pre-approval establishes how much you’ll be able to borrow so you can buy a home. When you choose a lender for pre-approval, they’ll assess your debt-to-income ratio and weigh your income, debts, assets, and credit score to establish how much they’d consider loaning you based on these verified numbers. A pre-approval tells sellers that your finances are in order and that you should be able to secure the money you need to carry through with your offer. When you make an offer, submitting a pre-approval letter along with your offer gives the seller security and assures them that you’re a verified buyer.
Pre-approval also lets you filter out homes beyond your means and gives your agent a clear sense of what you’re ready to buy. With a pre-approval letter in hand, you can search for homes within your budget that suit your needs. Most pre-approval offer letters are valid for 90 days only and require a hard credit check, so you should only apply when you’re ready to buy.
Pre-qualification is different from pre-approval
If your homebuying journey isn’t immediate, you might get pre-qualified to get a sense of what you can afford. Pre-qualification is a simple process that establishes what you can afford based on your income, debts, and assets or worth right now. It’s quick and simple, an easy way to get a general sense of what kind of mortgage you might be eligible for. If your pre-qualification establishes that you require a bigger downpayment than you thought, you can take a few years to pay off debts, look for work, or improve your credit score to qualify for a better loan down the road.
Pre-approval goes one step further than qualification. It requires a credit check and verification of your financial standing with a professional lender. It’s based on your verified, in-depth financial standing.
See also: Pre-approval vs. Pre-qualification
Are you guaranteed a mortgage once you’re pre-approved?
Every new homebuyer should know that a pre-approval isn’t a guarantee. Think of pre-approval like a conditional offer. During the pre-approval process a lender establishes the risk of lending you money, runs a mortgage stress test if they’re an A lender, and makes sure you’ll be able to keep up with payments. The pre-approved amount is based on these numbers. If the numbers change, your offer may as well. Changes in your financial situation can result in a denial and cause the lender to withdraw your offer.
The top reasons mortgages are denied after pre-approval
Keeping your financial situation consistent is the most important way to make sure your loan application is approved when you’re ready to buy. Many new homeowners also underestimate closing costs which can include legal fees, renovation costs, appraisals, and inspections. So it’s a good time to keep a consistent budget and save where you can. When you were pre-approved, the lender used your debt-to-income ratio to establish your bottom line. This means weighing your debts against your monthly income and assets. Your mortgage approval is based on your financial standing at the time of approval.
New large purchases or debts
New debts can change your financial situation and the kind of mortgage you’re eligible for. Don’t make any big purchases or take on new debts after pre-approval. If you’re looking to make a big purchase that might need financing, wait until well after you’ve closed on your home and paid all closing costs.
Missed payments or a lower credit score
Make any debt payments on time to keep your credit score consistent. If you miss credit card payments or get behind or bills after pre-approval, a lower credit score could result in a denial on your mortgage. Keep your credit score up by paying off debts where possible and paying on time.
Changes in employment
Your income and employment were part of why your mortgage was pre-approved. This isn’t the time to consider a new career direction or to quit accounting to pursue your painting hobby. Layoffs or changes in employment income can alter your personal finances. Any change to the consistent income or assets considered during the pre-approval process could affect the offer you were given, so do what you can to keep your income consistent.
What can I do if I was denied my mortgage after pre-approval?
If you were denied your mortgage after pre-approval, know that you’re not alone and you have options. Many homebuyers face costs they didn’t anticipate, or experienced unexpected layoffs and financial challenges. Here’s what you can do to reassess and expand your options.
- Get all the information you can. If you’re denied, make sure you understand exactly what changed or why the pre-approval didn’t go through. Was it your credit? If so, paying your bills on time for the next six months could bring the score back up. Was it about your employment? Perhaps there are steps you can take to restore your finances to what they were when your income was verified. The information regarding your denial will help you shape a plan of action and understand what’s possible. So before you catastrophize, get the facts! Your financial advisor can help you crunch the numbers.
- Improve your mortgage options.
If you have some time to rebuild your credit score, pay off debts, or save, then take this opportunity to improve your financial portfolio and come back stronger than ever in a few years. It might make you eligible for a better mortgage with a lower downpayment or interest rate. - Look at other employment or income options. Perhaps it’s time to ask for a raise or consider other income streams that might increase your income and make you eligible for a higher pre-approval.
- Think outside the box. If you have a partner and were considering buying solo, think about joint mortgages or alternatives. In some cases, buying with friends or family can be a way to increase options. But make sure you have legal documentation and clear boundaries if you go this route. Mixing business and friendship can have consequences if expectations aren’t crystal clear.
- Consider other type A lenders. Ask your real estate professional or financial planner for more options to consider what other lenders might offer. If your financial situation has changed, the right lender for you may have changed too.
- Rethink your plan.
We all have a vision for the kind of home we want and the way we want our lives to go. But this could be a good time to ask why you’re looking to buy the home you have in mind. If finances have changed, perhaps it’s wise to consider renting for a few years or downsizing to save and improve your credit for a better pre-approval option in the future. Maybe there are costs you can cut by rethinking how you work; perhaps you can give up your cubicle for a home office and cut down on rental costs for the office space you’re paying for. You might choose to do vacations close to home and save on airfare to bulk up your financial portfolio. Take time to rebuild the road map in case another option exists. - Look into private lenders.
If you’re not being offered a mortgage you can afford by type A lenders in Canada, you can consider private lenders. Private lenders typically charge higher interest rates but may offer you a lower downpayment requirement. If your salary has changed, a private lender might be a better option for you. Private lenders don’t require a mortgage stress test like big banks and most type A lenders do, so you might qualify for more with a lower credit score or a less certain income.
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