The reason you get pre-approved for a mortgage is because it provides greater certainty that your loan will close. You want to know what size loan you qualify for before you shop for a home or make an offer.
Getting pre-approved also enables you to identify and resolve potential issues before you submit your loan application. This is why if you are pre-approved, in most cases your mortgage goes on to close as scheduled -- because you have already addressed potential obstacles to closing your loan.
In a relatively small number of cases, however, applicants are rejected for a mortgage even though they were already pre-approved for the loan. There are multiple reasons why your application may be declined after you have been pre-approved, which we outline below. Most of these issues relate to potential changes in your credit or financial situation.
Your credit score dropped. If your credit score decreased from the time you were pre-approved until when you applied for the mortgage, this may make it more challenging to qualify or to afford the loan amount you need. For example, borrowers with a lower credit score may pay a higher mortgage rate which decreases the mortgage you qualify for.
The lender found an issue on your credit report. In some cases the lender does not review your full credit report when you are pre-approved and instead relies on your credit score. If the lender finds a derogatory issue on your credit report during the application process, such as missed mortgage payment or default, you may not be approved even if your credit score meets the minimum requirement. This is why it is important to disclose all significant credit issues when you are pre-approved.
Your income decreased. If you took a pay cut after being pre-approved, you may no longer qualify for the mortgage. Lenders are required to verify that you can afford the monthly mortgage payment so if your income drops significantly this poses a significant challenge.
Your debt payments increased. The other factor that lenders examine to determine your ability to qualify for a mortgage is your monthly debt expense. If you incurred additional debt after you were pre-approved, you may not be able to afford the same mortgage amount.
You took out a new loan. Taking out additional debt or a new loan can increase your monthly debt payments and also negatively impact your credit score, both of which can make it much more challenging to get approved for a mortgage. This is why we recommend that you not apply for any new loans until after your loan closes.
You changed jobs. If you changed jobs and your income or how you are compensated changes you may be required to wait before you can qualify for a mortgage. For example, if you go from being a regular employee paid on an hourly or salary basis to being self-employed or paid primarily via commissions or a bonus, you may have to wait one-to-two years before you apply for the loan.
You do not have enough money for your down payment. One of the more common reasons why your application may be rejected is because you do not have the funds required for your down payment. The lender should verbally verify this information when you are pre-approved but this is not always the case. In short, if you do not meet the down payment requirement, you cannot qualify for the mortgage.
You cannot pay for closing costs. In addition to your down payment, you are also required to pay mortgage closing costs which can run thousands of dollars depending on your loan amount, property value and other factors. If you have not properly budgeted for closing costs this can create a significant obstacle when it is time to close your loan.
You do not have sufficient financial reserves. Some mortgage programs require you to hold savings in reserve at the time your loan closes. If you do not have enough money saved, your mortgage may be declined or you may be required to wait until you have the necessary funds. This is why it is important to understand any applicable reserve requirement before you apply for the loan.
There is an issue with the property. Although a pre-approval applies to the borrower and not a specific property, if the appraisal report identifies significant structural issues with the home, your application may be rejected. Additionally, if the appraisal comes up short and shows an estimated property value that is significantly lower than your offer price, this may reduce the mortgage amount you are eligible for or cause your loan to be declined. This is why we recommend that you obtain a property inspection report after your purchase offer has been accepted.
If you can avoid the issues we describe above, then your pre-approval should remain valid, your application should be approved and ultimately your mortgage should close. If none of these issues apply to you and your loan was still rejected then we recommend that you contact other lenders to explore your financing options.
The table below shows mortgage terms for leading lenders in your area. We recommend that you contact multiple lenders to confirm their qualification guidelines and to find the lowest rate and fees.« Return to Q&A Home About the author