You secured your pre-approval for your mortgage, so you assume you’ve got it ‘in the bag.’ Did you know, though, that there’s no guarantee of getting the mortgage to the closing table? The preapproval does mean that the lender evaluated your qualifying factors for the loan, but there are many things that can still go wrong.
Typically, there are at least a few months between when you get preapproved for a loan and when you close on it. If you aren’t careful, any of the following reasons can make your loan fall through the cracks.
You Damaged Your Credit
Don’t make the mistake of assuming that once a lender checks your credit for preapproval that you are in the clear. They will pull your credit at least one more time, depending on how long it takes you to find a home after getting preapproved.
At a minimum, the lender will pull your credit right before you close on the loan. This gives them a chance to look over your credit one more time to make sure nothing changed. If you made late payments after you got preapproved or you overextended your credit during that time, your credit score may have fallen. If it did and it fell far enough, you may end up with a credit score that’s too low for the loan program. This could cause you to lose your loan approval.
You Spent too Much Money
Many people make the mistake of thinking that once they get preapproved that they can spend what they want. On the contrary, though, you should actually just ‘freeze’ your finances. The lender approved your loan based on the snapshot they took of your finances at the time. They want to see your finances stay that way in order to approve you for the loan and get you to the closing.
If you go out and buy furniture on credit or buy a new car, you spend money that the lender wasn’t planning on you spending. This has an effect on your assets as it depletes them, and it also has an effect on your debt ratio, which affects your loan approval.
It’s a good idea to avoid making any large or unnecessary purchases after your preapproval and through the closing date. Once you close on your loan, you are free to spend what you want, but spending beforehand can only leave you with a revoked loan approval.
You Changed Jobs
Lenders preapprove you for your loan based on your employment and income at the time of application. If that changes after you get preapproved, it could change the landscape of your loan. If you change jobs, lenders typically have to go back to the drawing board. First, they need you to have a little experience at the job. In other words, they can’t write you a loan after you are on the job for 2 days. The exact amount of time you have to be there will vary by lender and lender program, though.
Next, they need to know that your job will continue for the near future. While no one can predict what will happen in the future, just knowing that the job is secure for now will give the lender reassurance that you’ll be able to pay the loan.
Sometimes you may have to wait until you are at your new job for 6 – 12 months before a lender will accept it as a valid form of income. If you can keep your current job through loan closing, it would help you keep your loan approval.
Issues With the Appraisal
The final issue isn’t one that you can help, but it does ruin loan approvals often. The lender must rely on an appraiser to figure out the fair market value of the home. If the appraised value is less than what you bid on the home, you could lose your loan approval. Lenders can only lend you money based on the appraised value, not the purchase price.
If the appraisal does come back lower, you generally have a few options:
- Walk away from the home because you can’t get financing
- Pay the difference between the appraised value and the purchase price
- Renegotiate the price of the home with the seller
Either way, your financing gets changed. If you walk away from the home, it’s probably because you lost your approval based on the appraised value of the home. If you pay the difference between the appraised value and the purchase price, you have to prove that you have the money to do this. If you renegotiate, the lender will have to start your loan process all over again.
As you can see, your loan preapproval isn’t set in stone. It can fall through at any given moment if you aren’t careful or if the home isn’t worth, what you thought it was worth. Staying in close contact with your lender and keeping your finances as ‘frozen’ as possible will help you have the best outcome.