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If you’re in the midst of the homebuying process, you’re probably familiar with pre-approval: the process of completing a mortgage application with a mortgage lender to see if you’re approved for a loan. If you’re pre-approved, the lender tells you how much you’d be able to borrow, but pre-approval does not guarantee that you’ll get a home loan. Many people are surprised to learn they can be rejected after receiving pre-approval. Fortunately, there are actionable steps you can take to improve your odds of getting the mortgage you need.
Key Takeaways
- Pre-approval is often the first step in the home-buying process, where you apply for a mortgage to determine the amount a lender will lend you.
- Lenders aren’t required to give you a mortgage even if you were previously pre-approved.
- Your mortgage application might be denied if your income has changed, your credit score drops, interest rates rise, or the property you want to buy doesn’t meet qualifications.
- To improve your approval odds, you might shop around for a different lender or improve your credit score.
Reasons Why Your Mortgage Could Be Denied After Pre-Approval
Many factors determine whether your lender will finalize your mortgage. Unfortunately, several things could cause them to deny your mortgage even after you’ve been pre-approved.
Tighter Lender Criteria
If housing market conditions have gotten tougher or the economy has worsened since you got pre-approval, the lender might have been forced to become more selective about who it lends money to.
Changes to Your Financial Situation or Job
Lenders don’t want to see big changes to your income, since that means you might not be able to repay your mortgage. If you recently lost your job, took a pay cut or are on reduced hours, or one of your income streams dried up, your lender might drop you.
A Recent Drop in Your Credit Score
It’s hard to overstate how important your credit score is when you’re purchasing a home. After all, it reflects how you handle debt and your ability to repay money you borrow. So, if your score drops significantly after pre-approval, your lender might think twice about servicing your mortgage.
An Increase in Interest Rates
If interest rates have gone up but your income hasn’t, you might not be able to make the higher mortgage payments, so your lender might pull the offer.
Your Pre-Approval Amount Is Too Low
Typically, when you’re pre-approved, a lender specifies how much you could borrow. However, if the amount is too low to reasonably make an offer in your housing market, the lender might not want to go forward with offering the loan. Just because you pre-qualify doesn’t mean the lender guarantees you a loan.
The Property Doesn’t Qualify
Depending on the mortgage type, there are property qualifications that the home must meet. If it doesn’t qualify, you can’t get a mortgage. For example, if the home is in poor shape or being sold as-is, the lender may not agree to finance the property.
What to Do if Your Mortgage Is Rejected After Pre-Approval
It’s disheartening if your mortgage falls through after you’ve been pre-approved, but it’s becoming increasingly common. Before you let yourself get down, figure out why your mortgage was denied. Contact your mortgage lender and ask for a clear explanation.
Once you understand why the lender refused the loan, you can take steps that might improve your odds of approval going forward. For example, your lender might require extra income documentation, or maybe you need to pay down some debt to improve your debt-to-income ratio.
If there aren’t many actionable steps you could take, it might be time to shop around for a different lender or even a different property to purchase.
Tip
If you were pre-approved for a property, but market conditions have changed and you lost the offer, you may need to find a property that meets the lender’s conditions or consider working with a mortgage broker who can find you an offer.
The Bottom Line
It’s frustrating to be pre-approved only to have your mortgage application denied when you need it. However, it’s not uncommon, especially when the housing market is tight or the economy worsens. If you’re unsure of what to do next, find out why your mortgage didn’t go through and try to address the issue. If it was denied because of factors outside of your control, you might shop for a different property or work with a mortgage broker who can help you navigate the application process.
