by Aidan Kang, CFA
Senior Writer
Loans
UPDATED: October 13, 2022

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 home loan? According to a report, the chances of getting denied after pre-approval is about 8%, 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.

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.

Conclusion

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.

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