Even if you receive a mortgage pre-approval, your loan can still be denied for various reasons, such as a change in your financial situation. How often does an underwriter deny a loan? According to a report, about 8% of home loan applications get denied, depending on the location.
If you don’t want to be part of that percentage, here are some important things you need to know to avoid getting your application for a mortgage loan declined after pre-approval.
What is Underwriting a Loan?
When you get pre-approved for a mortgage, does this mean you’re all set? No. You still need to go through the underwriting process.
Keep in mind that a mortgage pre-approval doesn’t guarantee you loans. So, for the question “Can a loan be denied after pre-approval?” Yes, it can.
Borrowers still need to submit a formal mortgage application with the mortgage lender that pre-approved your loan or a different one. During the underwriting process, the lender will perform a comprehensive check on your finances to know if you can afford the mortgage or not.
Why is Underwriting a Mortgage Loan Important?
Underwriting allows lenders to verify the applicant’s earnings through bank statements, debt, assets, and details of the property to be purchased to assess if a mortgage loan application will be approved or not. Be sure to respond to the requests of the lending company during the underwriting process (e.g., providing additional documents). This can help make the mortgage approval process go quickly and smoothly when you are buying a house.
What Happens During the Underwriting Process?
1. Evaluating Your Financial Status
The underwriting process is an unavoidable part of getting a mortgage loan so you can purchase a home. After filling out the mortgage application, the underwriter will check your financial situation and assess if you can manage its payment or not. They will review your bank account statement, W-2 forms, pay stubs, tax returns, monthly debts, and other sources of income you may have.
2. Checking Your Credit Standing
During the mortgage approval process, the lender will also check your credit report to gauge how responsible you are as a borrower. The underwriter will look at your credit scores, payment history, age of your accounts, and credit usage. Having a good credit score increases your chances of getting approved and qualifying for a lower interest rate.
VA home loans don’t have a minimum credit score. You need at least a 620 FICO score for a conventional mortgage loan and a minimum of 580 for an FHA loan.
3. Appraising The Property
The property you want to buy will also be appraised to verify if the amount you wish to borrow is within the value of the property. The appraisal also considers the age and size of the house, as well as the recent sale of similar homes in the area. The mortgage lender will also order a title search to make sure that the property has no unpaid taxes or any outstanding claims.
Once all these are done, the underwriter will decide whether your application will be approved, denied, or suspended until additional documentation is provided upon their request. The length of the underwriting process can be a few days or weeks, depending on the lender.
What is a Loan Pre-approval?
A mortgage loan pre-approval is an official letter from a lender that details the maximum amount that you can borrow as well as the interest. You can also use a mortgage calculator to get an idea if you can afford the price of the home you are keen on.
You get this documentation by completing an application and providing financial documents including your pay stubs. The process involved differs among lenders and may take a few days to review your application.
If you qualify, you will receive a pre-approval letter. Its validity differs among lenders, but in general, it can be used within 90 days.
What are the Advantages of Pre-approval?
1. You Know How Much You Can Afford
You need to consider several factors and make many decisions when you’re looking to buy a new home. But before anything else, you need to know how much you can work with.
Purchasing a house is one of the biggest investments you’ll make in your life. If you’re like most people, you probably won’t be paying all the costs upfront. By getting pre-approved, you’ll know how much your budget would be, allowing you to look for a property that’s within your budget.
2. You Become An Attractive Buyer
There are two types of real estate markets when you’re looking to purchase a home – the seller’s market and the buyer’s market. In the seller’s market, there is a high demand for real estate properties but the supply is low. Meanwhile, in a buyer’s market, the supply is high but the demand for properties is low.
If you’re thinking of buying in a seller’s market, having a mortgage pre-approval letter on hand gives you an advantage over other buyers who don’t have one. There’s a higher chance that the seller will go with your offer since you pose a lesser risk that the deal will fall through due to insufficient money.
3. You Have More Negotiating Power
A mortgage pre-approval gives you more bargaining and negotiating power, especially in the real estate market. Sellers are more likely to negotiate with a home buyer who has been pre-approved. You will be in a better position to get what you’re asking for, such as some home repairs.
4. You may Close the Deal Faster
With a pre-approval, your home loan application will be approved more quickly, and you get the financing you need to close the deal. Being pre-approved for a mortgage can help you close the deal faster.
In general, a home closing usually takes 35 to 50 days. It may take you less than that if you’re pre-approved and if you have a real estate agent to help you out.
5. You Can Shop Around for Lower Interest Rates
As a buyer that got pre-approved, you can look for other lenders and find one that offers you the best interest rate. But, you need to be careful since submitting multiple applications within a short period of time can negatively affect your credit score.
Why Does the Denial of a Mortgage Loan Happen?
Your application can still be denied even if you were pre-approved. Several things could derail your home buying plans and cause the lender to decline your application after pre-approval, such as a change in your credit score, employment, earnings, and debts.
1. Changes In Your Credit Score
Lenders consider your credit score when they give you a mortgage pre-approval. If your credit score has dropped below the minimum credit score requirements since you got pre-approved, your home loan application may still be denied.
Your score may have dropped recently for a number of reasons, such as taking on new debt, making late, or missing payments. You should monitor your credit standing carefully from the time you got pre-approved and until you file a complete home loan application. Practice good borrowing habits and make sure there are no errors in your credit report. For tips on how to improve your credit score you can read this article.
2. Increase in Debt
Can a pre-approved mortgage be denied at closing? Yes. Taking on more debt will have a negative effect on your application.
Lenders will check your debt to income ratio (how much you earn versus how much you owe). If your debt is higher than your income, they may think that you can’t take on new debt and therefore, lead to a denied application.
3. Unverifiable or Insufficient Income
Lenders will check all your sources of income before they approve your mortgage to make sure that you can meet the minimum monthly payments when you get approved. If the lender can’t verify where you get your money using the information you provided or if you don’t earn enough with your current job, your application could be denied.
4. Appraisal Issues
Some financing applications are denied even after getting pre-approved due to appraisal problems. For example, if the home appraisal didn’t meet the requirements to justify the amount.
What Happens Next When Your Mortgage Loan Gets Denied?
The lender will send you a notice of adverse reaction when your application gets denied. This letter will explain the reason for the rejection of your application. You could expect to receive this within 30 to 90 days after you completed a home loan application. It will give you an idea of what led to the denial and what you could do to improve your chances of securing approval in the future.
What Can You Do to Prevent this from Happening?
- Don’t Incur More Debt – Don’t use your credit card or take out any type of loans until after you the closing date.
- Check Your Credit Report – Review your credit report from all three credit bureaus to make sure that there are no errors or problems that may lead to a loan declined before settlement.
- Bring Accounts Current – Pay your dues on time and make sure all your payments are current. Good borrowing habits will have a positive effect on your credit report.
- Avoid Negative Income Changes – Maintain your earnings and employment status or add to it if possible by having a side hustle. If you’re planning to quit your current work and start a new job, it’s best to wait until the closing date has passed.
What Can You Do if Your Mortgage is Denied?
- Talk To Your Lender – Get in touch with your lender and ask why your mortgage application was declined. This way, you’ll know what caused the problem and how you could fix it.
- Dispute Errors In Credit Report – Check your credit report to see if there are any inaccuracies. File a dispute with the credit bureaus and have the mistakes corrected.
- Rebuild Your Credit – Build a strong credit history by paying back the money you owe on time. Your credit score will improve gradually and you’ll have higher chances of getting approved for a mortgage.
- Reapply After You’ve Fixed The Problem – You could reapply for a mortgage again once you’ve fixed the problem. Although there’s no official time limit on how long you need to wait before submitting another application, it’s best to find the right timing. For example, you must have a solid job/employment history, a good credit score, and sufficient income and savings.
Buyers must secure a mortgage pre-approval when looking for a new home. However, a pre-approval doesn’t guarantee that you will be approved for a mortgage. Your application will go through the underwriting process, which will determine your eligibility. To avoid having your mortgage loan denied in underwriting, you should monitor your credit score, avoid incurring new debt, have enough savings, keep your job, and pay your dues on time.