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by Christy Bieber | Updated July 19, 2021 - First published on Jan. 10, 2021
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Mortgage pre-approval doesn't always mean you're guaranteed the ability to borrow.
When you're shopping for a home, getting mortgage pre-approval is an important part of the process. Most sellers will require you to include a pre-approval letter with any offer you make to prove you're a serious, well-qualified borrower. Getting pre-approved also helps you better understand how much you'll be allowed to borrow.
But while the term "pre-approval" may make you think you're guaranteed to be approved for a loan, that's not necessarily the case. The process does involve providing a lot of information, and lenders will take an in-depth look at your finances when deciding whether to grant pre-approval. But even when you get it, the lender isn't 100% committed to giving you a loan.
In fact, a number of things could go wrong before closing. Here are four things that could kill your chances of securing a mortgage that you thought was a sure thing.
Your income is one of the most important factors that lenders consider when deciding if you should be approved. After all, they want to be sure you can afford the payments and that you aren't getting in over your head with borrowing.
Obviously, when you request pre-approval, lenders base their decision on your income at the time. But job losses can happen, as can job changes or reductions in hours.
Before final approval, your lender will want to see proof of recent earnings to make sure your income hasn't declined. If it has, there's a substantial chance you won't be able to get the mortgage.
Your credit score is another extremely important deciding factor in whether you can qualify for a home loan or not. Unfortunately, that means a reduction in your score could lead to a pre-approved loan offer being rescinded.
Your score may drop a small amount if you get hard credit checks when shopping for a mortgage loan. That said, the best mortgage lenders will let you compare rates without an inquiry on your credit report. This minor drop isn't likely to have any impact on your ability to borrow. But if you miss a credit card payment, or other negative information posts to your credit record and your score goes down substantially, this almost certainly will derail your efforts to borrow.
When mortgage lenders look at your income, they also want to see how much of it is devoted to debt payment. As a result, they'll look at your debt-to-income ratio (DTI). If that ratio creeps up too high (factoring in your new mortgage payment), you'll find yourself cut off from borrowing.
If your debt was low enough at the time of applying that you fell below the mortgage lender's DTI cutoff but you've since borrowed more money, you may no longer qualify for the loan. Depending on how close you were to the DTI limit, it may not take much to put you over that line so you can't borrow.
Finally, lenders also consider the appraised value of the home you're hoping to purchase when deciding whether to approve your loan. Obviously, they want to ensure the home is worth enough that it secures the loan.
If your house appraises for less than you offered, this may affect your loan-to-value ratio (the amount you're borrowing relative to what the property is worth). If your loan-to-value ratio gets too high, you'd either need to make a larger down payment or your loan would fall through.
Obviously, losing your ability to buy a home because of a drop in credit, a drop in income, an increase in debt, or an appraisal issue can be frustrating. Fortunately, you can avoid most of these problems by not borrowing more before closing on your loan, making a sizable down payment, and keeping your credit and income steady during the buying process.
In other words, try to maintain the status quo as much as possible until you're all set up in your new home with a mortgage loan from the lender of your choosing.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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