Between higher credit score and down payment requirements, getting a mortgage has become more challenging in recent years. Therefore, finding out you’re preapproved for a mortgage might be the best news you’ve heard all year.
A preapproval involves a mortgage lender reviewing your income, credit and debt to determine whether you qualify for a mortgage and how much you can receive. Getting a preapproval letter gives you the green light to start looking for a new home. Understand, however, a preapproval doesn’t guarantee closing on a mortgage.
It might come as a surprise, but a lender can deny your home loan after issuing a preapproval letter. The bank isn’t trying to make your life difficult or steal your happiness. The truth is, a lot can happen between applying for a mortgage and closing on the loan. And if your situation changes drastically within these weeks, lenders have no choice but to pull the plug on the mortgage.
Here’s a look at three situations that might cause a lender to decline your mortgage after you’re preapproved.
1. A negative item hits your credit report
You don’t need perfect credit to qualify for a mortgage loan, but there are credit score requirements. If your recent credit activity proves you’re moving in the right direction and working hard to improve your credit habits, some banks will overlook a damaged score. As of 2015, conventional loans require a minimum 620 credit score, whereas FHA loans allow credit scores in the 500s. But this doesn’t mean everyone with a low score qualifies. Recent late payments, collection accounts and judgments will hurt your chances of getting a mortgage.
So you’ll need to maintain good credit habits after getting preapproved. This isn’t the time to start paying bills late. If you believe a creditor will report negative activity on your credit report in the upcoming weeks, do everything possible to resolve the situation. Your lender will check your credit when you apply for the mortgage, and again one or two days before closing.
2. Your debt increases after getting preapproved. The amount you’re able to receive from the bank depends on your income and current debt load.
Unfortunately, if you accumulate additional debt after getting preapproved — such as a car loan or another line of credit — this can reduce the amount you’re able to spend buying a new house.
As a rule of thumb, don’t use credit cards and don’t apply for new credit until after closing on the mortgage. If you must get a new loan, speak with your lender first to see whether the loan will jeopardize your mortgage approval.
3. Your employment or income changes
Any change to your employment status and income can put the brakes on a mortgage preapproval. Remember, the mortgage preapproval was based on your income and employment status at the time of submitting your application.
Even the slightest change will cause a lender to reevaluate your financial situation. If you switch employment but remain in the same field of work and your income doesn’t decrease, you’ll most likely be able to close. However, if you switch fields completely, take a job paying less or quit your job to start your own business, the bank may determine you no longer meet the requirements for a mortgage and cancel the loan.
Buying a house is stressful enough, and the last thing you need is problems with your mortgage loan. If you can maintain your credit score and avoid major income and employment changes, you’ll get through closing with few hassles.