Buying a house for the first time can be very exciting. The first and most important step in the home buying process is the mortgage pre-approval. But, many first-time homebuyers have the misconception that once they are pre-approved, they can change their financial situation without the possibility of their approval also changing. A lender issues a pre-approval based on an individual’s employment, income, credit, debts, and down payment. If anything changes the individual’s financial picture after they receive a pre-approval but prior to closing on a house, the lender has the right to either change the approved amount or deny the loan. Some of the most common pitfalls that cause a loan to be denied after a pre-approval was issued include the following:
Home Inspection – If during the home inspection major repairs are cited, these will likely need to be corrected prior to the loan closing. This is especially true if the pre-approval is based on government financing (FHA, VA, or USDA Loans).
Credit Inquiries- Credit inquiries have a negative impact on your credit score. After you are pre-approved it is important to avoid your credit being pulled by other lenders until you have officially closed on your house. Most lenders will be notified if your credit is pulled prior to closing on your mortgage. You will likely have to provide an explanation letter on why your credit was pulled, and verify if the inquiry resulted in new debt. Credit reports are typically good for 120 days. If your credit report expires, the lender will need to update your credit report. In this instance recent multiple credit inquiries may lower your score and possibly disqualify you for a mortgage.
New Purchases- Your pre-approval is based on a snapshot of your income and debt at the time you applied for the loan. If you purchase anything on credit prior to closing such as: appliances, carpeting, furniture, new car, or any other significant purchase, your debt ratio will change possibly resulting in denial.
Employment- The pre-approval issued to you was based on your income and employment. If you change your employment, your income may change or the income you will now earn in your new job may not be acceptable to the lender. If you accept a new job that has commission, tip income, bonus, or a probationary period the lender may not use your income to qualify you.
Undocumented Funds- All the money needed to close on your mortgage will need to be documented showing the source of funds. Any large deposit in your bank account from the date of your pre-approval to the date you close on your mortgage will need to be documented. Gift funds (if acceptable per loan type) typically will need to be documented with a copy of the gift check, a gift letter, and proof the funds came from the giftor’s bank account.
Over-drafts- Most lenders will require a current bank statement within 30 days of closing. If there are any recent over-drafts on your bank account, they will need to be thoroughly explained as a one-time occurrence.
Self-Employment- If you are self-employed, there are many circumstances that may change your financial picture after the pre-approval process. These include expenses written off on your tax return, current profit and loss statement (showing income stability), undisclosed debts, and personal debts being paid through the business. If you are self-employed, be very diligent when you inform your loan officer of your complete financial picture, so there are no surprises when it comes time to close your mortgage.