Getting pre-approved for a mortgage is a key part of the process when it comes to shopping for a home. Many sellers even will require you to include a pre-approval letter with any offer to ensure that you’re a serious, well-qualified buyer. Getting approved also helps you determine how much you’ll be able to spend.
Just because you get a mortgage pre-approval, however, that doesn’t necessarily mean you’ll be guaranteed to borrow the money for your new house. In fact, several things could go wrong before closing. Here are four things that could hamper your chances of securing a mortgage that you thought was a sure thing.
1. Decreased income
Income is one of the most important factors your lender considers before deciding whether or not to approve you for a loan because they want to be sure you can afford the payments. When you request pre-approval, your lender will base his or her decision on your income at the time.
Job losses can happen, though, and so can job changes or reduced hours. Before final approval, your lender will want to see proof of recent earnings to make sure your income hasn’t declined. If it has, there’s a considerable chance you won’t be able to obtain a mortgage.
2. Reduced credit score
Your credit score also is a crucial deciding factor when qualifying for a home loan, and that’s why a reduction in your score could lead to a pre-approved loan offer being rescinded. While a minor drop likely will have little impact on your ability to borrow, missing a credit card payment or receiving other negative information posts to your credit record will reduce your score substantially. This almost certainly will derail your efforts to borrow.
3. Increased debt
When your mortgage lender examines your income, he or she also wants to see how much of it is devoted to debt payment. As a result, they’ll look at your debt-to-income (DTI) ratio. If that ratio gets too high (factoring in your new mortgage payment), you’ll find yourself cut off from borrowing.
If your debt was low enough at the time of applying that you fell below the mortgage lender’s DTI cut off, but you’ve since borrowed more money, you could no longer qualify for the loan. Depending on how close you were to the DTI limit, it might not take much to put you over that line so you can’t borrow.
4. Appraisal issues
When deciding whether to approve your loan, your lender will consider the appraised value of the home you’re hoping to purchase to make sure the home is worth enough that it secures the loan.
So, what happens if your house appraises for less than you offered? It could affect your loan-to-value ratio (the amount you’re borrowing relative to what the property is worth). If your loan-to-value ratio gets too high, you’d either need to make a larger down payment or your loan would fall through.
