Many homebuyers understand that a pre-approval isn't a guarantee, but it often comes as a shock that a mortgage can be denied even after
. Understanding the nuances of the lending process is the best way to avoid a "denied" notification at the eleventh hour.
The Two Stages of Financing
Securing a mortgage generally happens in two distinct phases:
- Mortgage Pre-Approval: Usually the first step, this helps you determine your budget and strengthens your offer. Lenders perform a preliminary review of your income, debts, credit score, and assets. This is conditional and based on the information available at that moment.
- Final Approval: This occurs after you’ve made an offer on a specific property. The lender performs a deep dive, verifying all documentation, ordering a property appraisal, and reviewing the title.
Why Denials Happen After Pre-Approval
Because pre-approval is based on limited, "snapshot" data, several factors can cause a lender to reverse their decision during the full underwriting process:
- Change of Employment: Lenders look for stability (ideally 6+ months with the same employer). A sudden career pivot can trigger a red flag.
- Credit Score Drops: If you take on new debt or miss a payment, your score may dip below the lender's preferred threshold (typically 650).
- The Mortgage Stress Test: Lenders calculate if you could still afford payments if interest rates were to rise. Failing this test—even if you're approved for the current rate—can block the loan.
Can a Mortgage Be Denied After Final Approval?
Yes, although it is rare. Even after final approval, a mortgage can fall through due to:
- Employment or financial changes: Job loss, new debt, or missed payments can affect approval.
- Fraud or misrepresentation: Providing false information or identity theft can lead to denial.
- Title issues: Liens or previously undisclosed claims against the property can stop funding.
- Appraisal problems: If the appraisal comes in below the loan amount, you may need additional funds to proceed.
- Property damage: Significant damage discovered at the final walkthrough can affect the loan.
How to Protect Your Mortgage Approval
Until the funds are advanced, follow these steps:
- Keep your job until closing, even if a new offer is attractive.
- Make all debt payments on time, ideally a few days early.
- Avoid taking on new debt or opening new credit accounts.
- Keep documentation ready in case your lender requests more information.
