Can You Be Denied a Mortgage After Preapproval?

8 Red Flags That Could Lead to Mortgage Denial After Preapproval or Prequalification

There are certain red flags that could result in your mortgage being denied after you were preapproved or prequalified to borrow.

1. Your Credit Score Drops Significantly

When you get prequalified or preapproved, lenders will typically review your credit history and check your credit score. Unfortunately, negative events after your lender reviews your credit could result in your score dropping and your lender denying your loan because you now present a bigger credit risk.

Late payments, an account getting sent to collections, or maxed-out credit cards could suggest you are getting into financial trouble and could make it too risky to lend to you. Your loan could ultimately be denied because of these or other issues.

2. There Are Issues with Your Application or Paperwork

Your application should include bank statements and tax returns so lenders can confirm your income, assets, and other details about your financial situation.

If you are missing documents, your forms have errors, or you've misstated your income or assets, this could mean you aren't as qualified a borrower as the lender expected.

Having too few assets, being unable to show evidence of your income, or having too little income could all disqualify you from a mortgage loan.

3. Large Unexplained Bank Deposits or Withdrawals Appear

Mortgage lenders need to know the source of income to make sure that you are getting your money for your home loan from a legitimate place. A large unexplained bank deposit could result in your lender denying your application, as they might suspect you borrowed money from someone and will have to pay them back eventually.

Lenders also look at the assets you have for your down payment and closing costs, as well as what you have on reserve. If you recently had a large withdrawal and no longer have the money in your bank account, lenders may deny your loan during the final underwriting process because you present a bigger borrowing risk without assets.

4. The Home Appraises Below the Purchase Price

Lenders require a home appraisal because their maximum loan-to-value ratio is based on how much the home is worth on the market. The lender wants to make sure the home is worth enough to act as collateral on the loan.

Appraisal gaps are common and can happen if you offer to pay more than the home is worth. In these situations, you could negotiate with the seller to reduce the price. You could also bring more money to the table for difference between the appraised value and the amount you are paying for the home.

5. Your Employment or Income Changes

If you experienced a major change to your employment or income, this could be a red flag that your income may not be stable and that you may not be able to pay the loan as required.

Losing a job, switching companies, taking a job that pays less, moving from salaried to commission-based compensation, receiving reduced hours, or transitioning to self-employment could all affect your loan approval because they may make your lender fear your income will be less consistent.

6. You Took on New Debt

When you borrow, lenders also want to make sure you can easily afford to pay your debt.

To determine this, lenders look at your debt-to-income ratio (DTI). This ratio compares the payments on your existing debt and your home loan to your income. If the ratio of total debt is too high (typically above 36% to 43% of your income), you may not be able to borrow.

If you have taken on any new debt after prequalification or preapproval, this could affect your debt-to-income ratio and potentially result in you not being able to borrow.

7. Problems Are Found During Title Review

Title is used to determine ownership of a home. When you buy a property, a title search is conducted to make sure there are no competing ownership claims.

If the title search shows liens on the property, disputes over ownership, judgments, or other title issues, this could result in the home loan being denied. This is because the lien or other issues affect the home's ability to act as collateral.

8. The Property Doesn't Meet Loan Requirements

Finally, lenders typically have minimum standards regarding the home's conditions. If there are health or safety issues revealed in a home inspection or appraisal, those issues may need to be fixed before a lender will be willing to provide a mortgage loan.

What to Do If Your Mortgage Is Denied After Preapproval

If your mortgage is denied after preapproval, this doesn't mean you won't ever get a loan. There are a few options for what to do to try to get back on track for borrowing.

• Find out why your application was denied: Lenders typically must provide an adverse action notice explaining the reasons for denial. This will help you understand what you need to fix.
• Review your credit and financial information: Make sure your credit report and financial documents don't contain any inaccuracies or errors that may have impacted the lender's decision to deny your application. If there are mistakes, you can correct them.
• Address the underlying issues: Once you know the cause of the denial, you can pursue a solution. This may include paying down debt, correcting mistakes on your credit record, increasing your savings, documenting your income more thoroughly, or resolving issues with the property such as making repairs.
• Communicate with your lender about your options: Your lender may be willing to work with you to try to find a solution to your mortgage denial. This could include adjusting the terms of your loan, adding a co-borrower, increasing the down payment you're making, or exploring an alternative loan program.
• Consider reapplying when you are ready: If you can improve the factors that led to the denial, you can reapply for a new loan.

Ultimately, it's worth remembering that while a mortgage denial can be disappointing, you can often find a path toward approval once you understand the cause.

How to Avoid Getting Denied After Mortgage Preapproval

While most borrowers who get preapproved or prequalified successfully close on their home loans, changes in finances or employment can create complications during the underwriting process. If you want to reduce the chances of this happening to you, consider the following:

• Avoid taking on new debt or making major financial changes: Keeping your finances stable helps you ensure you continue to meet your lender's qualifications.
• Make on-time payments: Paying all bills on time protects your credit history and credit score.
• Keep your employment stable: Avoid changing jobs until you have closed on your mortgage loan.
• Maintain your down payment and closing funds: If you have money in reserves for a down payment and for closing costs, don't spend those funds while waiting for final approval.
• Document large deposits: When you deposit a substantial amount of money, make sure there is a clear paper trail showing where the money came from, so you can prove the source of funds to your lender.
• Don't close existing credit accounts: Doing so has the potential to reduce your credit score by changing your credit utilization ratio. Any change in your score could be a red flag.

Ultimately, it's important to remember that the closer your financial situation remains to what it was during preapproval or prequalification, the more likely it is that your mortgage process will stay on track through closing.

Mortgage Denial After Preapproval FAQs

Still need to know more about mortgage denial after preapproval or prequalification? Here are the answers to some frequently asked questions.

What Are the Chances of Getting Denied After Preapproval?

Most borrowers who get prequalified or preapproved are able to successfully borrow. However, you will be more likely to get denied if you change your job, take on other debt, or start missing credit card payments. If you maintain a stable financial situation, odds are good that you will get final approval.

Can a Mortgage Be Denied Right Before Closing?

A mortgage can be denied right before closing but this is generally very rare. You will usually be able to close on a mortgage after prequalification or preapproval unless there is a problem with the home or a major change in your financial credentials.

Can You Reapply After a Mortgage Denial?

You can reapply for a home loan after a mortgage is denied. You will typically want to address any issues that resulted in your denial in order to maximize your chances of your next application being successful. This could mean taking steps like improving your credit or paying down debt.

Final Thoughts: Staying on Track for Mortgage Approval

Staying on track for mortgage approval involves keeping your finances stable after prequalification or preapproval. You can work with your mortgage lender to understand what is expected of you and to make sure you are on track towards final approval during the borrowing process.