You walk out of your lender’s office, and everything seems a little bit brighter.
You’ve just been Pre-Approved for a mortgage! You’ve done your research and know exactly what home you want to buy, and it’s within the budget established within your Pre-Approval Letter. There is literally nothing stopping you from buying the home of your dreams!
Whoa, there…you may be misunderstanding the nature of a Pre-Approval. Yes, it does suggest that you qualify for a loan, but it doesn’t guarantee anything.
Does this mean that getting Pre-Approved is irrelevant? Not at all. Having a Pre-Approval Letter is a powerful tool when working with a Realtor or approaching a seller. But it’s important to understand that Pre-Approvals are underwritten with strict parameters for the conditions under which you are approved for the mortgage. And it’s important you stay within these barriers, or you may be denied a mortgage, despite being Pre-Approved.
Here are 6 ways that a Pre-Approved buyer can find themselves denied at the last moment.
1. Negative Marks on Your Credit Report
Your lender ran a credit check when you applied for Pre-Approval. Your score was good, and that had a positive impact on what you were approved for. That’s not the final score, however. Your lender will base your official mortgage application on what your credit score is at that moment, maybe months after you were Pre-Approved. If you forgot to make payments—on anything from your utilities to your car—you may receive a negative mark on your credit report. This will hurt your ability to qualify when the time comes.
2. Changing Jobs
You got a new job last month, and it pays more than the job you had when you were Pre-Approved. Sounds great…but it will actually cause problems when you apply for a mortgage.
For one, it’s best to stay at one job for at least two years before applying for a mortgage…lenders like to see stability, even if the new job includes higher income. How you receive that income also makes a huge difference in your mortgage application. Is it a standard salary, or are you paid on commission? Do you receive performance-based bonuses? All are considered differently by your lender.
3. Taking on New Debt
Your fridge is outdated, and you plan on getting a stainless steel beauty to complement your new kitchen. You might want to make that purchase after you’ve successfully closed on a new home, unless you can pay for the entire fridge with cash. Just like buying a car, buying an appliance or other expensive item on credit will have an impact on your credit score. And again, your credit score when you apply for a mortgage will be the deciding factor. Don’t get overexcited and shoot yourself in the foot!
4. Lacking the Cash for A Down Payment
Maybe you shouldn’t pay for the new fridge with cash either. Your Pre-Approval assumes you will put an agreed-upon percentage of the home’s value forward as a down payment when you make the purchase. If you want to make a lower down payment because you just don’t have the cash, your Pre-Approval isn’t going to hold up. Keep an eye on your personal budget while searching for a new home.
5. A Sudden Influx of Cash
A down payment is a lot of money to put down, and many buyers rely on cash gifts from parents or other relatives to make it work. This is perfectly legal, and a reasonable strategy. But make sure you report this gift when you get Pre-Approved. Just like with a new job, surprising your lender with a high amount of cash in your account will disrupt the plans set forth during the Pre-Approval process.
6. A Surprise Appraisal Value
You don’t need to worry if an appraisal comes in high; what the seller doesn’t know won’t hurt them. But what if an appraisal comes in low? Your lender is not going to offer you the full value of the mortgage you were Pre-Approved for if they know the home is worth less.
There is a way out of this scenario, however: Address the appraisal with the owner, and see if they will renegotiate the selling price for the home. If they are willing to sell for the value that the appraisal suggests, you can still qualify for the mortgage. You can always get a mortgage for less than you were originally Pre-Approved for, but don’t expect your lender to settle for an overpriced home.