Why A Pre-Approved Mortgage Can Still Be Declined
Introduction: The Nature of Pre-Approvals
Getting pre-approved for a mortgage in Canada is an important step in the home buying process. It gives you an estimate of how much you may be able to borrow. This can help you narrow down your home search and budget accordingly. It involves a lender assessing your financial information, such as your income, assets, debts, expenses, and credit history, to determine how much they might be willing to loan you. While a pre-approval can increase your chances of final approval, it’s not a guarantee that you will ultimately be approved for a mortgage. A mortgage can still be denied even after pre-approval. This can lead to a real estate deal falling through. There are several reasons why a mortgage can be denied even after pre-approval.
Reasons for Decline After Pre-Approval
Change in Employment
One of the most common reasons for a mortgage decline is a change in employment. Lenders often require a solid employment history. If you’ve recently changed jobs and are still in the probationary period with your new employer, this could negatively impact your mortgage approval. Exceptions may be made in some cases, like if the job change is within the same field.
Reduction in Income
Your income is one of the most important factors that lenders consider when deciding if you should be approved. After all, they want to be sure you can afford the payments and that you aren’t getting in over your head with borrowing. If your income has declined, there’s a substantial chance you won’t be able to get the mortgage.
There are several ways to approach this situation. You may qualify for a lesser mortgage amount; or if your spouse works, perhaps you can apply for a joint mortgage, at which time the lender will use your combined income to determine affordability.
Credit Issues
While perfect credit is not a requirement for mortgage approval, lenders do have minimum credit score requirements. If your credit score drops after pre-approval due to missed debt payments or the acquisition of new debt, this could lead to a pre-approved mortgage offer being rescinded. Also, if you shopped around for credit too many times, and submitted too many applications, that will have an impact on your credit.
If you are turned down for a mortgage due to a low credit score, take steps to rebuild your credit. This can be as simple as paying all your bills on time over the next 6 to 12 months, or paying off a credit card to decrease your credit utilization ratio, which will subsequently raise your credit score. Raising your credit score increases you chances in more than one way, first by helping you qualify, secondly by qualifying you for a better rate, and finally by having a credit score over certain level, the debt servicing ratios that lenders use are higher, meaning you will qualify for a higher mortgage amount.
Down payment issues
The source and amount of your down payment are important factors in mortgage approval. If the down payment is unverifiable or in cash, it could raise concerns about its legitimacy and lead to a mortgage decline. Furthermore, if your down payment is too insufficient, it could make it harder to qualify for a mortgage.
Additional Debts
Taking on significant debts during the mortgage approval process is not advisable. Large purchases or applying for a line of credit after pre-approval could lead to a mortgage decline. The additional debt will increase your required payment amount, which will affect your Total Debt Service Ratio, and once it crosses over certain level, it starts affecting your qualification.
Large Purchases After Pre-Approval
This one kind of ties in with two factors. If the purchase was done on credit, than that affects your qualification ratios. If the purchase was done by paying it outright with your own funds, then it might affect the savings for your down payment. Your lenders will review your bank account before the final approval of your mortgage to ensure you have enough for the down payment, and related expenses such as closing costs. Unless you are confident you will get mortgage financing, do not lose the deposit on your home purchase and get a financial condition in place. So if your finances change significantly after pre-approval, such as buying a new car or financing a major purchase, a pre-approved mortgage could be declined.
Property Issues
The property you intend to purchase is also evaluated during the mortgage approval process. If the property has issues such as structural damage, mold, or requires major repairs, lenders might be unwilling to approve the mortgage. If the property has a history of being a grow house, has a zoning other than residential, has more than 4 units, or some of the house components are known to be hazardous, such as asbestos, vermiculite, etc., it might lead to a decline.
Listing Issues
If the MLS property listing describes the property in an unfavourable manner, such as handyman special, TLC needed, damage of any sort, and similar concerns, it could lead to a mortgage decline. Lenders are more prone to lend to properties that have good appeal, and are readily marketable.
Appraisal Issues
All approvals are subject to satisfactory confirmation of value on the property being mortgaged. Your lender will want to know the home you purchase is worth the money they decide to loan for your mortgage. This is usually done by an appraisal, in a way of full appraisal, drive-by appraisal or automated valuation (AVM). If the appraisal reveals issues, or provides value lower than the purchase price, the mortgage application could be declined, or the mortgage amount reduced, in which case the borrower must come up with larger down payment, to bridge the shortfall in the appraised value.
Expired Pre-approvals and Changes in Interest Rates
Pre-approvals are typically valid for a certain period, and many of the lenders will go up 120 days. If it takes longer to find a house, or the closing date is longer than that, the pre-approval will expire before you finalize the mortgage. And, if interest rates rise significantly from the time of pre-approval, it could affect your debt servicing ratios, and that could lead to a mortgage decline, or an approval for a lower mortgage amount.
Discrepancies from Previous Application
If there are significant differences between your current application for approval, and the previous application for pre-approval, it could lead to a decline. Lenders might view these discrepancies as red flags, indicating potential fraud or misrepresentation.
Documentation Discrepancies
Mortgage lenders require various documents to verify your income, employment, assets, and financial status. If there are discrepancies or inconsistencies in these documents, it could raise concerns about your ability to repay the mortgage. For instance, if your income included on the application doesn’t match the income stated in your tax returns, or your pay slips, it could lead to a mortgage decline.
Job Status Errors
Mortgage lenders require stable full time employment, or part time with guaranteed hours, and certain length of employment. If your job status is misrepresented on the application, it could lead to a mortgage decline. Sometimes people work full time hours, but their job status is considered to be part time, or temporary, even if they’ve been working there for a long time. So errors are made when completing the application stating full time, where in reality they are not, and the only time that is brought up is when their employer issues the Work Letter confirming that.
Improper Pre-approval
If the pre-approval was merely a rate lock-in guarantee, it might not have taken into account other crucial factors such as your credit history, employment status, down payment sources and debt servicing ratios. Some lenders will issue pre-approval certificates without fully underwriting their pre-approvals, and without verifying any of the information included with the application for pre-approval. This could lead to a mortgage decline when these factors are evaluated during the actual approval process.
Changes in Lending Guidelines
Sometimes, a lender or mortgage insurer may change their requirements and guidelines after pre-approval. These changes could include modifications in lending policies, or a mortgage insurance premium increase. Also, government policies might come in effect that could restrict certain aspect of the mortgage process.
What Can You Do If Your Mortgage Is Declined After Pre-Approval?
If you find yourself in this situation, don’t despair. First, find out why you were declined. Don’t hesitate to ask your broker or your lender for an explanation. Understanding the reasons behind the decline can help you take the necessary steps to improve your chances of approval in the future. Just because an approval wasn’t granted at that particular time, it doesn’t mean it will always stay that way. Lenders are in the business of lending money, and if you address the reasons for the decline, they will lend you the money for the mortgage when those issues are resolved. Remember, knowledge is power, and understanding the mortgage approval process can help you make informed decisions on your path to homeownership.
Conclusion
As previously stated, while mortgage pre-approvals are essential first step in the home buying process, they are not a guarantee that the actual mortgage will be approved. Remember, maintaining financial stability and demonstrating responsible credit behaviour are crucial during the mortgage application process. By avoiding any potential pitfalls, you can help ensure your mortgage pre-approval turns into an actual approval that leads to a successful closing.
We at TheBroker.ca Ltd, can offer you helpful advice on pre-approvals, mortgage rates and how to satisfy any lender imposed conditions that are part of the approval process. We can guide you through the process and help you understand the reasons behind mortgage declines, and how to overcome them.
We understand that applying for a mortgage can be challenging and frustrating. We work closely with many lenders to ensure that our clients receive the most suitable mortgage approvals based on their individual circumstances. As part of that commitment we are constantly upgrading our knowledge about the mortgage products offered by our lenders, and the latest mortgage industry news and trends, so we can provide our clients with the information they need to make informed decisions about their mortgage options.
About Us
At TheBroker.ca Ltd, we are constantly looking for ways to provide helpful advice related to mortgages, current mortgage rates, and more. If you have any questions or need further assistance, we offer a complimentary no-obligation consultation. Feel free to reach out to us at (519) 252-9665 during our regular business hours. Alternatively, you can fill out our contact form, and your message will be promptly emailed to us. We value your time and inquiries, and we make it our priority to respond to all messages within one business day. When reaching out, please provide us with your contact details, a brief overview of your mortgage needs, and the most convenient times for you to have a consultation. We look forward to assisting you with your mortgage.
This article was brought to you by TheBroker.ca Ltd., a mortgage brokerage that is licensed with the Financial Services Regulatory Agency of Ontario (FSRA), which regulates businesses in the financial sector. The Principal Broker Sash Trajkovski has over 20 years of real estate and mortgage experience in the Ontario marketplace. You can verify our licenses by visiting the following links from FSRA’s website: our corporate license and Principal Broker license. Our mortgages services are available to all residents of Ontario. If you’re in Ontario and looking for more personalized advice and information, consider booking your Complimentary Consultation today, and let us help you understand the details that will guide you on your path to a suitable mortgage solution.
Disclaimer: Please note that this information is current as of the date of publication and is intended to be general in nature. It is not intended to provide legal, tax, financial, or other professional advice and should not be relied upon as such. Always consult with a professional for advice tailored to your individual circumstances.
