Fifteen Ways to Get Your Mortgage Denied
Did you know that a loan can be denied after funding? Unfortunately, you can lose your mortgage approval if you’re not careful.
Getting pre-approved for a mortgage is an exciting experience. You now have the go-ahead to shop around and find the perfect home. But with all the excitement, it is essential to remember that you do not have the money in your hand yet.
Some mistakes can be made that may jeopardize your mortgage approval. The last thing you want is to miss out on your dream home, so pay careful attention to the following tips to avoid getting your mortgage revoked.
Not only is getting a mortgage preapproval revoked embarrassing, but it can also be avoided easily.
Having your mortgage approval denied at the last minute is a highly stressful event nobody wants to go through.
In my thirty-eight years as a Realtor, I have been fortunate never to have a client lose their mortgage after a preapproval was granted. Others are not so fortunate. Some of my collegues clients have lost their mortgage after receiving their preapproval. These are stressful situations nobody wants to go through. You wont have to think about it by following sound financial advice.
Remember that you can revoke your preapproval by making mistakes. A lender can cancel your mortgage approval.
Keep reading to find out what not to do when buying a home with a mortgage!
What is a Mortgage Preapproval?
A mortgage preapproval is the most sensible approach to demonstrating your financial viability when purchasing a house.
With preapproval, the lender will vet your financial qualifications by verifying your income, employment, and credit standing. Once these things are confirmed, a lender will provide a preapproval letter.
It is essential to note that a preapproval is not a commitment to lend. The property a buyer wants to purchase needs to be vetted, including a real estate appraisal. Lenders want to know if the property they provide a mortgage has enough value.
Typically, mortgage preapprovals are usually good for ninety days. Some lenders can reduce the time to 60 days, so check upfront. Remember to monitor interest rates. They can that significantly affect your mortgage terms and approval.
What is a Mortgage Commitment Letter?
A mortgage commitment letter is a written confirmation from your lender that you are qualified for the loan. After completing the preapproval process, lenders issue a formal assurance to grant acceptance of a loan application.
Typically, it takes mortgage lenders three to five weeks to grant a mortgage commitment.
The mortgage commitment letter a buyer receives could have some conditions that need to be satisfied before a closing can be completed. Once a mortgage commitment is granted, buyers usually don’t have to worry about the loan being denied.
However, as we are going to discuss, it is certainly possible.
How to Avoid Getting Your Mortgage Denied
There are many ways buyers can get their mortgage preapproval or final approval revoked before closing on a home. Here are the most common mistakes borrowers make after being pre-approved that must be avoided at all costs!
1. Changing Employment.
Getting a different job is familiar enough that you might not consider changing employment if a new, better opportunity presents itself. But after you are pre-approved for a mortgage, you want to avoid making any changes that could impact your loan.
Stable employment is a critical factor that lenders consider before finalizing your mortgage.
Your preapproval was based on your status at the time of application, and your employment status was a significant factor in the lender’s decision. When you go change jobs, you throw the whole equation in disarray.
If you have the opportunity for a better job, speak to your mortgage broker about it. They may counsel you not to change jobs until the home has closed, as lenders want employment stability.
It’s possible that changing jobs but staying in the same line of work won’t be a problem. Verify this, however, before making any decisions!
2. Misleading Employment
Employment verification and stability are paramount in the eyes of lenders. A steady job demonstrates your ability to repay the loan and reflects your financial reliability. Misleading a lender when filling out mortgage preapproval paperwork would be a significant mistake.
Lenders often verify your employment status before closing to ensure no significant changes have occurred since your initial application. If you’re contemplating a job change, discussing this with your mortgage broker to understand the potential impacts on your loan approval is advisable.
Remember, consistency in your employment history and income stream can significantly influence the underwriter’s final decision. Maintaining stable employment throughout the mortgage process is critical to securing your home loan. I recommend you never mislead a lender about your current job.
3. Apply For Other Loans.
One of the most common ways people get their mortgage approval denied is by taking on additional debt before closing their home. Maintaining a low debt-to-income ratio is crucial for keeping your mortgage approval secure.
Understanding how to get a mortgage includes avoiding mistakes.
Now that you know you will purchase a home, it can be tempting to start shopping for everything you need to fill it.
But applying for credit is another way to mess up your mortgage preapproval. The loan you were pre-approved for is based not only on your employment status but also your credit status.
The lender plans to authorize the mortgage loan because it believes your credit status indicates that you can make your payments.
If you take out other loans, like signing up for a credit account with your local furniture store, you risk negatively impacting your credit status and missing out on your mortgage.
Buying a house is an exciting time when many people get anxious and want to go shopping for their new place.
Keeping your home spending in check is necessary so you don’t jeopardize your mortgage approval.
One of the typical mortgage mistakes people make is buying a car while also purchasing a home. Many loan approvals have been revoked because of this mortgage blunder.
4. Making Large Deposits You Can’t Document.
Before you get your mortgage loan, the lender will want to see current records indicating the status of your accounts, including your savings and checking accounts.
If a significant deposit in any of these statements does not match your average income, it can throw off the loan.
Before you obtain gifts from family or make significant sales, like selling a car, contact your mortgage lender and find all the documents you need to explain the large deposit.
Many lenders will require a letter of explanation documenting the reason for the large deposit.
Lenders will be cautious about reviewing your spending habits over the last three years.
5. Getting Divorced.
If you apply for your mortgage with a spouse, the preapproval you obtained will only work if you are still married when you buy your home. All the calculations that made up the loan process were based on you and your spouse being together.
Getting separated is one of the topics I discuss regarding selling a house when getting divorced.
If you get divorced, then everything changes. You can expect the lender to decline the mortgage, or at best, the lender will authorize a loan substantially smaller than the one you were pre-approved for while married.
Take a look at some great advice about purchasing a home after divorce. One of the most important takeaways is ensuring your financial house is in order before going out and buying a home.
6. Forgetting to Pay Your Credit Cards.
Before the lender gives final mortgage authorization, it will review all your information again to see what has changed.
Your credit status will be scrutinized, so late credit card payments will be noticed and raise a red flag for the lender.
One late payment may not be enough to lose your mortgage – but it might. The way credit is calculated can be incredibly complex.
It is best to be as cautious as possible and avoid doing anything negatively impacting your credit. A high credit score is your best ally in preventing your mortgage from being taken away.
Pay your credit card bills on time to avoid any potential problems. Your credit history makes up thirty-five percent of your credit score. It is the most significant determining factor for credit scores.
Even if you don’t lose your mortgage approval, a reduction in credit scores could prevent you from getting the best mortgage rate.
7. Closing a Credit Card Account.
You may be financially successful, and all your hard work has resulted in you paying off one or more credit cards.
Paying off a card can be exhilarating, but don’t make the mistake of closing the account before you get your mortgage.
It may be counter-intuitive, but closing a credit card account can complicate your credit status.
One factor that improves your credit score is having an open and good-standing account. Closing the account erases the history of responsible credit use.
You also lessen your available credit percentage, negatively impacting your status. So, if you close a long-standing credit card account, it could lower your credit score.
If unsure what decisions will negatively impact your score, you can sign up to use Credit Karma. The benefit of Credit Karma is that it tells you how your choices affect your credit.
It is vital to understand that there is a minimum credit score to buy a house.
8. Paying Your Rent Late.
Your years of on-time rent payments show the lender that you will likely pay your mortgage on time. If you get careless and fail to pay your rent when you should, the lender may decide you are not as responsible as you seemed at preapproval.
The lender will look back over at least two years of rent payments.
The last thing you want to do is ruin your two-year history of on-time payments with a silly mistake so close to getting your mortgage.
Buyers must be keenly aware of how not paying their obligations can come back and bite them in the ass.
9. Missing Your Last Mortgage Payment.
This may seem like an odd mortgage mistake, but it is possible. Recently, I had a client purchase a new home in Millbury, Massachusetts. Their existing home needed to be sold before they could close on their new construction purchase.
The closing on their current home took place in the early part of June. Their existing mortgage payment was due at the end of May. Unfortunately, they did not make their last mortgage payment, thinking it wasn’t a problem because they were closing in a little over a week.
It became a significant problem, as Bank of America considered it a late mortgage payment. The buyer could not qualify for the loan on the new home, and their mortgage approval was taken away!
This caused a significant hassle, as the buyer could not close on their new construction purchase. They had to procure different financing from another lender. The credit hit also forced them to switch from a conventional to an FHA mortgage.
10. Settling Old Collection Accounts.
Old collection accounts are another area where home buyers can make mistakes without realizing they are doing so.
You would think that paying off old debts would be good, but your credit score may be hurt if you pay off old collection accounts right before you get your mortgage.
The preapproval process already factored in your old collection accounts, so paying them to offer now is not beneficial.
Paying them off could cause your credit score to drop quickly – long enough to mess up your mortgage.
11. Spending Your Savings.
When you tell a lender that you have a certain amount of savings, you are expected to have that money when you get your mortgage.
It is easy to spend your savings in the lead-up to the home purchase, but you want to avoid doing so. If you cannot verify that you still have the savings listed in your initial loan preapproval, you risk being denied by the lender.
As mentioned, you must be frugal with your funds before closing the home.
After the home’s closing, you will be safe from losing your preapproval, but that doesn’t mean you should be any less fiscally responsible.
12. Getting in Legal Trouble.
If you are involved in a lawsuit between the time you are pre-approved and the time you need the mortgage money, you could lose your loan.
If the lawsuit doesn’t go your way, there is a chance your wages could be garnished; you could be subject to fines or lose a substantial amount of income. None of those things looks good to a lender.
If you are in a lawsuit, inform your lender so your mortgage approval is not denied.
13. Picking the Wrong Home to Buy.
Did you know it is possible to buy the wrong home? It’s true! For some properties, your preapproval will become void because they do not meet lender guidelines, as mortgage broker Luke Skar points out.
It is essential to check the qualifications of the home you buy depending on the loan type you’re getting. There are some types of financing you can get, including:
- Fannie Mae or Freddie Mac-backed loans.
- FHA financing.
- USDA financing.
- VA funding.
Each loan type will have specific restrictions regarding the home you are purchasing. Luke does an excellent job summarizing some of the standard stumbling blocks of getting a mortgage on each loan type.
Ensure you are not purchasing a home with financing that will not work! Some people pick certain loans to avoid paying private mortgage insurance. That’s great, but not if the loan program is not the right fit for your purchasing property.
Don't pick a home that doesn't meet lender guidelines!Click To Tweet14. Appraisal Issues.
Low appraisal problems differ slightly from the other 13 ways to get your mortgage approval taken away. These different reasons are mostly in your control, while getting the home you buy to appraise is not.
You may encounter an appraiser who feels you are overpaying for the home you’re purchasing.
In such cases, the owner or their real estate agent will likely fight the low appraisal amount. There is no guarantee, however, that they will be successful. You may find the terms of your sale need to be changed to keep your loan approval.
Understanding your loan-to-value ratio can provide insights into your mortgage’s stability. To avoid complications with your mortgage, ensure the property appraisal meets or exceeds the expected value.
15. Fraud Will Cause Loan Denial.
Committing fraud on a mortgage loan application is not an intelligent thing to do. Doing so, of course, will more than likely result in your mortgage approval being taken away.
Lenders today are more careful than ever when it comes to lending money. They scrutinize the information given to them by borrowers very thoroughly. It is unlikely that you will put one past a mortgage company today.
Final Recap of a Mortgage Being Revoked.
The underwriter’s final review is a critical step before your mortgage is fully approved. I recommend you review your Closing Disclosure carefully, as it contains vital details about your mortgage terms.
The bottom line is that your mortgage can be revoked before and after funding. Before finalizing your mortgage, ensure that all conditions are met to avoid any issues with the escrow process.
Each of these fifteen things can cause your final mortgage approval to be denied. Avoid these common mortgage mistakes, and you will have nothing to worry about.
If you have made one of these errors, you must immediately contact your mortgage representative and let them know. A mortgage can be revoked even after the loan has been funded.
Additional Helpful Mortgage Resources
- How to get the best loan terms—Learn how to get the best mortgage rates for your home loan via Maximum Real Estate Exposure.
- Types of people who should not buy a home – sometimes, buying a house doesn’t make sense. See who should not buy a home via Conor MacEvilly.
Use these additional resources to make sound financial decisions when purchasing a home.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above real estate information on a mortgage being revoked after funding. Bill has expertise in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications in which he has been featured. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. For the past 38+ years, Bill has helped people move in and out of Metrowest towns.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge Massachusetts.
Great article Bill. I think the take away is don’t do ANYTHING to change your credit profile while you are in the process of buying a home unless instructed to by your mortgage officer.
Very true Kevin. Many mortgage mistakes are associated with doing something that will adversely impact your credit!
Best list I’ve ever seen Bill, as more frequently you just read that buyers shouldn’t buy lots of stuff before the closing.
Thanks Tina. There are many mortgage mistakes than can be made easily if you are not given any guidance.