How To Make Sure Your Mortgage Pre-Approval Doesn't Fail
For most people, shopping around and getting pre-approved seems pretty straightforward.
However, pre-approval is only half the battle. It's often a real estate agent's nightmare to find out that a person's lending or mortgage falls through since they're not guaranteed to close (even with a pre-approval).
There are 4 criteria that could cause your mortgage pre-approval to fall through:
1. Income Drop
If your income drops drastically, a lender may choose not to honor their pre-approval. This means that if you lost your job, your salary is cut, or any other way your income is changed, a lender may choose to cut your mortgage.
A lender will often ask you at closing to verify and sign documents that verify your current income at the time of application to ensure that your income is true.
2. Low Credit Score or Significant Change In Credit Score
There are multiple ways this can happen:
You declare bankruptcy.
You have an account that goes into collections.
You miss a credit card payment.
You close a credit card.
You open a new credit line.
There's a mistake on your credit report that needs to be fixed.
Generally speaking, if you're at the point where you can purchase the home and you have a pre-approval letter, you do not want to do anything that can change your credit. Continue the course you were on before the pre-approval, and your credit should stay roughly the same.
3. Debt Level Change
Often, excited new homeowners will go out and purchase large items that go alongside their home purchase. For example, a new homeowner may be tempted to go purchase a car or new, expensive furniture.
This, however, is not a good idea. Adding any new credit lines will drastically change not only your credit score, but also your debt level.
This is also because adding new debt changes your Debt-To-Income Ratio. To review:
In most cases, a lender will not loan you money if your debt-to-income ratio is higher than 36%. This means that for every 1 dollar of income, you pay more than 36 cents to debt payments. This is often referred as The 36% Rule.
Essentially, if you were at 30% with your home purchase, adding a vehicle may throw you over the 36% mark, and your mortgage could fall through with your lender.
4. Low Appraisal
Before closing on your home, your lender will want to have an appraisal done on your home. To review:
Once your appraisal is done and shown to the lender, it is possible that the home may end up being appraised for lower than the contracted purchase price.
In this scenario, your lender will either not lend you the mortgage because the home value does not cover the loan size or ask you to cover the difference between the contracted purchase price and the appraisal price as part of your downpayment.
Conclusion
Avoiding all 4 of these scenarios will allow your mortgage to go through. Some of these scenarios are out of your control, but most of these are well within your control.
In either case, don't hinge 100% on a pre-approval going through unless you know that you have all of these factors under control.