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.
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due to missed debt payments or the acquisition of new debt, this could lead to a pre-approved mortgage offer being rescinded.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 crucial 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.
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.
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.
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.
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 Change 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.
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.
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 were you declined. Don’t hesitate to ask your broker 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.
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.
We at TheBroker.ca Ltd, can offer you more 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. For any questions or further assistance, feel free to reach out to us at TheBroker.ca Ltd. via our website or at (519) 252-9665.
Please note that this information is current as of the time of writing and is intended for general informational purposes only. It should not be relied upon as financial advice. Always consult with a mortgage professional for advice tailored to your specific circumstances.
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