Congratulations You've Been Pre-Approved! Now Don't Mess It Up

One of the first steps in the home buying process is the mortgage pre-approval. However, even after you are pre-approved, some mistakes may result in your mortgage being declined. 

A mortgage pre-approval is based on a snapshot of your employment, income, credit, and assets. Altering any of these criteria may change the risk of the loan resulting in a negative decision. 

Most common mistakes

Change in Employment 

Income from a new job is viewed differently by mortgage companies and banks. Base salary, guaranteed hours, commission, job expenses, and probationary periods are all pitfalls of changing employment just before applying for a mortgage.

Cash Deposits

Lending guidelines require financial institutions to document all large deposits 60 days before and during the mortgage loan process. All large deposits must show the source of the funds. These include:

• Cash gifts
• Sale of assets: car, boat, furniture, etc.
• 401k or retirement account withdrawals
• Transfer of funds from one account to another
• All other large deposits

Transfer of large deposits from a joint account will likely require the full disclosure of the originating account. If you're required to document your last 12 months of rental payments, it may be necessary to explain large deposits on these statements also.

New Purchases

The original pre-approval was based on a calculated debt ratio, which fluctuates depending on the size or number of new purchases, including but not limited to:

• Appliances
• Furniture
• Home updates

All may increase the debt ratio to the point at which you no longer qualify for the loan.

Overdrafts

Banks and mortgage companies thoroughly review bank statements for large deposits and overdrafts. Many statements have an accumulative annual total of overdraft charges; expect to explain the reason for any overdrafts thoroughly.

Credit Inquiries

Continually having your credit pulled after the pre-approval process is risky. Depending on the loan type, credit reports are valid for 90 to 120 days. If the credit report expires or a credit update is required, the credit scores could fall, possibly below the minimum required credit score.

Unreimbursed Business Expenses

Lenders will review your last two years of tax returns for unreimbursed business expenses, losses on rental properties, and business ventures reported on the returns. Significant losses will likely be deducted from income, thereby changing the debt-to-income ratio.

Undisclosed Debts

These include but are not limited to:

• Child support
• Alimony
• Car payments from buy-here-pay-here companies
• Credit unions who do not report their installment loans

These debts will likely be questioned due to activity on bank statements or tax returns.

What else could result in mortgage loan denial?

There are also uncontrollable events that may cause a loan denial which includes a property reject. Depending on the condition and seller of the property, a rehabilitation loan may be required to complete a transaction. 

Often foreclosed and distressed properties, need funds to be put in escrow. If the seller does not perform the necessary repairs or allow the buyer to complete the repairs, the only option is a rehabilitation loan. 

Typically, a rehab or renovation loan has stricter guidelines than conventional loans (usually higher credit scores and tighter debt ratios). Before making an offer on a house, verify the pre-approval loan type.

Communicate with your loan officer and discuss any significant financial changes between the mortgage pre-approval and the loan closing.  The lender must have an accurate depiction of your finances as this is key to your final loan approval. 

Keep in mind that guidelines are continually changing, adding more uncertainty to the validity of the mortgage pre-approval.

Mortgage denial, especially after pre-approval, is devastating. Empower yourself with a thorough understanding of the mortgage requirements, thereby decreasing the possibility of a loan denial. But if you are unsure of any changes in your financial picture, call your loan officer.

Michael Zuren, PhD

I have 25 years experience in the mortgage banking industry. My experience includes the following loan types: (1) HomePath, (2) OHFA, (3) FHA 203k, (4) VA, and (5) USDA financing. I have been serving Cuyahoga, Lake, Geauga, and Ashtabula counties in Northern Ohio... more