Can Your Mortgage Be Denied After Preapproval?

Buying a home is one of the biggest purchases you can make. One of the first steps in the process is to get preapproved for a home loan. Mortgage preapproval may seem straightforward, but there are some considerations to be aware of.

Most importantly, loan preapproval is not a guarantee. Preapproval means that you’ve met the lender’s basic requirements at that specific time, and the lender is ready to initiate your mortgage based on your provided information and documentation.

Preapproval, especially VA loan preapproval, is a step in the right direction for prospective homebuyers, but it is usually weighed down with conditions and contingencies. Simply, if you're preapproved for a mortgage there is still a possibility you could be denied after.

In fact, approximately 5,741 VA loans were preapproved but not accepted according to 2022 HMDA data. Let’s explore more about what it means to be preapproved for a home loan and why you could be denied after.

Meeting Conditions in a Preapproval Letter

Once you’ve been preapproved for a mortgage, you will receive a preapproval letter. These letters are often used as leverage to show a seller you are a serious buyer, but they also outline certain conditions that need to be met for the loan to move forward or be fully approved.

These conditions are put in place to protect the lender and borrower if there are any significant changes to your financial situation. All of the conditions listed in the letter are important, and your mortgage may be voided if any of them aren't met.

Aside from changes in credit, the two most prominent conditions involve the appraisal of the desired property and final approval from the lender's underwriting team. If the conditions in your preapproval letter are not met, your loan could fall through.

To protect yourself from incurring any losses if your preapproval is voided, make sure any purchase agreement you sign includes a contingency covering your earnest money. Many sellers want prospective borrowers to put up earnest money, which is similar to a good faith deposit showing they're serious about buying the property. Without that contingency, you can lose a significant chunk of money if even one of the preapproval conditions isn't met.

Reasons Your Mortgage is Denied After Preapproval

Being denied after preapproval is frustrating and confusing for many prospective borrowers. Often, loan underwriting is a more extensive evaluation and can shed light on certain risk factors the preapproval process missed.

An underwriter will examine your entire loan file, from tax statements and W-2s to recent bank transactions and credit scores. The underwriter's job is to ensure your loan application meets all the specific loan and lender requirements before you receive a “clear to close.”

Suppose there are any discrepancies or changes in your financial situation since you were preapproved or haven’t met all your preapproval conditions. In that case, your mortgage loan may be denied in underwriting. The time between preapproval and closing is filled with potential pitfalls that can lead to these unexpected denials.

Here are some of the top reasons why preapproved applicants are denied for a mortgage:

1. Changes in Financial Situation

Financial stability is key when buying a home. Loss of employment or a job change can significantly alter your lender's assessment of your ability to repay the mortgage even if you were preapproved. In addition, any decrease in income or increase in debt, such as acquiring a car loan or racking up credit card debt, can negatively affect your debt-to-income ratio, making you a higher risk for your lender.

2. Significant Credit Score Changes

Your credit score is a snapshot of your financial trustworthiness. Any new negative entries on your credit report, increased credit utilization or opening new credit accounts can decrease your credit score. Lenders re-evaluate these scores before closing, and a significant change or unusual activity could lead to a denial.

3. Property and Appraisal Issues

Even if your finances remain stable after preapproval, issues related to the property can arise. For example, an appraisal value lower than the purchase price raises concerns about the loan-to-value ratio and can affect how much your lender will let you borrow.

A failed property appraisal can also influence your lender’s approval for financing since the desired home may not be in good condition. Similarly, unresolved liens or disputes found during a title search can complicate the lending process. VA loans have built-in protections to help buyers recover their earnest money deposit in the event a low appraisal ends a deal.

4. Changes in Loan or Lender Guidelines

Sometimes, mortgage denial after preapproval is beyond your control. Loan requirements change constantly, and lenders may adjust their requirements based on the current economic conditions.

You may have met all the requirements at the time of preapproval, but by the time you enter underwriting, some guidelines may have changed. Be sure to consistently communicate with your lender about a potential change in requirements.

What To Do If Your Home Loan is Denied After Preapproval

If your mortgage application is denied, it’s important to understand the reasons behind it and how to improve your chances of mortgage approval in the future.

Here are some steps to consider if your mortgage application was denied after preapproval:

Communicate With Your Lender

The first step should always be to talk to your lender for clarity. Understanding the specific reasons behind your mortgage denial is crucial. Was it due to a recent change in your financial situation or perhaps an issue with the property?

Lenders are obligated to provide you with a denial letter detailing the reasons for their decision. Use this information as a starting point for your next steps.

Decrease Debt and Increase Stability

Increased debt is a common reason for mortgage denials. Even with a good credit score, how much money you owe in relation to your income is a major consideration for lenders.

Before reapplying, try to lower your debt where possible—whether that be paying off high-interest credit cards or auto loans. Stability or a steady income is also an important factor since lenders favor borrowers with consistent earnings sources to pay off the mortgage loan.

Improve Your Credit

If issues with your credit history contributed to the denial, taking steps to improve your credit score is necessary. This could involve disputing any inaccuracies on your credit report, making all future payments on time or reducing your credit utilization ratio.

Taking advantage of free credit reporting services, like AnnualCreditReport.com, can help you stay on top of your credit score and address any issues promptly.

Build a Savings Fund

Having a substantial savings fund helps cover potential down payments and closing costs and demonstrates to lenders that you have the financial flexibility to handle unexpected expenses.

Start by setting aside a portion of your income into a savings account specifically for your home purchase. Consider exploring savings programs to enhance your financial readiness for homeownership.

The Bottom Line

While being denied a mortgage after preapproval can be disheartening, there are clear steps you can take to address the issues. By communicating openly with your lender, focusing on financial health and leveraging lender resources, you can improve your chances of securing a home loan on your next attempt.

Remember, persistence and informed action are key to overcoming this hurdle on your path to homeownership. Reach out to a Veterans United loan expert today to discover your mortgage options!