3 Issues that Can Cause a Pre-Approved Loan to be Declined
Thinking of purchasing a home in the near future? Understanding what a lender is looking for (and avoiding) is key to enjoying a smooth process.
A preliminary step to buying a home is getting pre-approved
. This process involves an initial submission of your financial picture to your loan officer to see if you initially qualify for financing and obtain an estimate of how much the lender is willing to lend you. Unfortunately, many people believe that once they have been pre-approved for a mortgage – the loan is guaranteed. Nothing could be further from reality. Your loan can be denied by the lender AFTER being pre-approved and it happens often.
What can go wrong?
1 - You’ve taken on additional debt or spent your cash reserves since getting pre-approved.
If it’s been a while since the last time you secured financing, it doesn’t take long to realize that things have changed. Debt-to-income ratios have become more critical than ever. Essentially, this ratio compares the amount of money you earn to the amount that you spend on reoccurring debts. Too much debt can cause your loan to be declined especially if you accrue that debt during the mortgage application process. Lenders are also looking at cash reserves in the bank that they expect to remain in the account until the loan closes. For example, if you are in the process of trying to buy a home, now is not the time to buy new furniture, a new car, take a vacation or max out credit cards etc. Be sure to speak with your lending professional
before making any large purchases before or after you’ve been pre-approved.
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2 – Your income or employment changes
When you are pre-approved for a home mortgage, the lender considers your financial situation at the time of submission but this doesn’t mean they stop “looking.” As we mentioned above, your income is critical to your approved status. If, during the underwriting process, your income changes (especially for the worse) it could cause you to be denied financing. Your income must be confirmed and verifiable which means that if you say you work “full time,” you must be able to show that you consistently work close to 40 hours a week. If you say you average 10 hours of overtime, you must be able to prove that average over 12 months for it to count. Additionally, be assured that lenders will be looking for specific instances in which your income is reduced by outside factors. A full month of paystubs can expose employee debts and tax returns might reveal deductions that reduce the income you can use to qualify. Similarly, a change in employment can also heighten the risk of a decline. One common example that can catch people by surprise is maternity leave. If you or your spouse plan on taking maternity leave before your loan is completed (and you need both incomes to qualify), you may need to wait until both borrowers have returned to full employment before securing financing.
3 – You have insufficient documentation
There are a variety (emphasis on quantity as well) of documents that are necessary for securing financing. These can include W-2 forms, bank statements, recent pay stubs, tax returns, divorce decrees etc. Don’t be surprised that a lender may not request all of the documents up front for a pre-approval but it is almost a guarantee that they will ask for them later. An underwriter might need additional documents depending on the circumstances of your finances. Having access to these crucial documents will make the process smoother and prevent you from experiencing delays when buying your home
. Keep in mind that it is likely that you need provide current up-to-date versions of items such as pay stubs and bank statements as the loan process progresses.
Key Take Away
Hopefully, you now understand the role that a pre-approval holds in the lending process. Getting pre-approved allows you to narrow your search of homes that match your budget and can make your offer more appealing to sellers however, it is not a lending guarantee. It is important that you work closely with your loan officer to make sure you present the best possible application to secure the financing you need.
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