Been Approved for a Mortgage? Here Are 5 Ways You Could Still Lose the Loan

If a mortgage lender becomes concerned about your ability to repay the loan, it has the right to withdraw the offer.

You're ready to buy a home and have already shopped for the best mortgage lender. You prequalify for a mortgage, then head out to shop for a house. You hunt for weeks (or months) and finally find a home you love and can afford.

Then, shortly before you're due to close on the home, you receive a call from your mortgage lender. Your mortgage has fallen through, and you have no way to finance the house.

This scenario may seem unbelievable, but here are five ways you can lose a mortgage.

1. Believing pre-qualification is the same thing as a pre-approval

Our first example illustrates how you can lose a mortgage you thought you had secured. Here's how it works:

As you shop for the right mortgage, lenders ask you many questions, including where you work, how long you've been employed there, how much you earn, and any debts you carry. Based on that information, lenders give you a rough idea of whether you'll qualify for a loan and how much you'll pay in interest. This is referred to as pre-qualification.

Pre-approval involves an in-depth review of your financial situation to confirm whether your loan application should be approved. While it's nice to know whether you'll qualify and how much you'll pay to borrow the money, a pre-qualification is not the same as a pre-approval. Lenders conduct a hard credit check to pre-approve a loan, comb through your credit reports, and verify how much you earn.

If you're serious about buying a house, don't head out to tour homes until you have a pre-approval letter. Then, if you do find a property you want to buy, you know that the mortgage lender is committed to providing the funds. Another advantage of a pre-approval letter is that it provides home sellers with proof that you're qualified to make the purchase.

2. Lying on the loan application

No matter what you're tempted to lie about, please don't do it. You will eventually get caught, and if the mortgage company catches on before you close on the house, you'll lose the mortgage. If the lender catches on after you've closed on the house, the lender has a legal right to call the loan in full. In other words, you'll be given a specific number of days to pay the loan off entirely. The lender can also sue you for mortgage fraud.

Here are some of the ways people commit mortgage fraud:

• Claiming you'll be the one living in the house. When, in reality, you're actually purchasing on behalf of someone with a poor credit score.
• Lying about your employment. If you've only been with an employer for two months, don't fib and say it's been two years.
• Exaggerating how much you earn. If you're self-employed, don't "fix" your records to show that you earn more than you actually earn.
• Failing to reveal the origin of your down payment. For example, if the money you're putting down on the house came from your grandmother, you can't say you saved it yourself.
• Omitting certain monthly obligations. Lenders are immediately suspicious if you fail to list all your monthly debts. For example, let the lender know if you're paying your parents $250 monthly to repay a loan. If you're paying alimony or child support, the lender needs to factor those amounts in too.

3. Overpaying for a home

As the past two years have shown, some home buyers are willing to pay whatever it takes to win a bidding war. That's fine, as long as those home buyers have enough tucked away to pay the difference between how much they've offered and how much the house appraises for.

Let's say someone offers $400,000 for a house that appraises for $300,000. The bank loan is based on the $300,000 appraised value. It's up to the buyer who overpaid to come up with the extra $100,000.

The mortgage company will withdraw loan approval if you overpay for a home that appraised too low and don't have the funds available to pay the difference.

4. Losing your down payment source

If you are using a VA or USDA loan to purchase a home, the lender is typically good about allowing your down payment to come from another source -- like a gift from a parent or grandparent. If, for some reason, the person giving you the funds decides they can no longer part with the money, loan approval will be withdrawn unless you can come up with it another way.

5. Racking up debt before closing

It is easy to get carried away once you know you're buying a new home. You begin to imagine all the things that will fill the home and may even go out and buy some of those things. Or, you may decide you need a new, fancy car to go with your new, fancy house. Whatever the situation, if you rack up new debt between the time you're approved for a mortgage and the day you close, the mortgage lender will know. Lenders run a final credit check right before closing. If the new debt pushes you over the lender's allowable debt-to-income (DTI) ratio, it will likely pull the loan.

That old proverb, "forewarned is forearmed," definitely applies to buying a home. Knowing what you should (and should not) do before the day you close will help you avoid disappointment and frustration.