When you’re ready to buy a home, one of the most important things you can do in the mortgage process is taking the time to get preapproved for your home loan. A mortgage preapproval is ideal because it can give you a clear budget, and it could help you win in a bidding war over someone who hasn’t gotten preapproved for a home loan. When you get preapproved for a loan, your mortgage lender runs a credit check and determines how much money they could lend you.
However, just because you’re preapproved for a loan doesn’t mean you’ll get the funds. Several things can throw a wrench in your home buying plans and result in the mortgage lender denying your loan.
Why would your mortgage get denied after preapproval?
1. Credit score changes
When a lender decides to give you mortgage preapproval, they do so with significant consideration of your credit score. Most mortgage lenders have minimum credit score requirements for home loans. If your credit score drops below that number, they can deny mortgage approval.
Your credit score can change for several reasons, including new debt, late payments, and closed accounts. Before you apply for a mortgage and during the preapproval process, you should consider monitoring your credit report to catch any errors or fraudulent items quickly.
To diagnose your financial situation, turn to a credit monitoring service. Credible's partners can help you find your credit score, history, alert you to potential fraud, and more.
When you check your credit score, it’s a "soft pull" or "soft inquiry," meaning that your score isn't affected. When your lenders check your credit and pull your credit report, it’s a "hard-pull." Hard credit inquiries show up on your credit report and can affect your credit score.
2. Debt increases
Your mortgage lender can also deny your loan application if your debt increases. Home buying can be exciting, but you should wait to purchase new furniture or other items for the house until after you’ve closed on your loan. If your debt increases, it could affect your debt-to-income ratio and your ability to make monthly payments on your new loan.
If you have multiple high-interest debts, you may want to consider a personal loan to help consolidate your payments into one bill. Debt consolidation can reduce your monthly payment, lower your interest rates, and make it easier to pay off your bills faster. Ideally, you should explore this option before applying for a mortgage loan.
If you would like to get a sense of what debt consolidation loan options are available to you, visit Credible to compare rates and lenders.
3. Appraisal problems
Your lender can deny your loan if the home appraisal comes in lower than your loan amount. You can appeal the mortgage denial, ask the seller to reduce the sales price or cover the difference with your own money.
4. Employment or income changes
If you lose your job or take a significant cut in pay after your lender preapproves your loan, they can rescind the approval. This will likely happen if your reduced income affects your ability to make your mortgage payment while covering other debts.
5. No records of where your money came from
When you’re applying for a mortgage, you can accept monetary gifts to help cover your down payment. However, you must keep records. You should also have anyone who gifts you money for this purpose write a gift letter. This letter shows the mortgage lender the funds aren’t a loan that you need to repay, so it doesn’t affect your ability to cover your new home loan.
If you think you’re ready to shop around for your interest rate, consider using Credible to help you easily compare rates with fewer forms to fill out.
Have a plan before you apply for a mortgage loan. Make sure your credit score is in good shape and set aside money for emergency expenses, so you don’t need to use your credit cards. Make sure to collect any gift letters from family or friends who contribute to your down payment.
As the housing market remains highly competitive, be wary of making an offer that’s too high to avoid potential appraisal issues.
Credible can help you compare multiple mortgage lenders at once in just a few minutes. Use Credible’s online tools and get prequalified today.