Before you begin your house hunting journey, it’s recommended that you get pre-approved for a mortgage. Getting pre-approved will give you an idea on the maximum amount of mortgage you could apply for as well as break down your monthly payments.
However, getting pre-approved does not mean a lender can’t ultimately refuse you for a mortgage.
Each lender has their own lending policies and guidelines. There are several reasons why your mortgage may not have been approved, but it doesn’t mean you can’t get a mortgage at all. Here’s how you can avoid being denied a mortgage and what to do if you are denied.
Why a Mortgage Can Be Denied After Pre-Approval
You may be denied for a mortgage even after pre-approval for a variety of reasons. Here are some of the most common:Poor credit: Most lenders require a minimum credit score of 650 in order to be approved. If you were pre-approved for a mortgage but then take on new debts or miss existing debt payments, your credit may drop below the required score and cause you to be denied.
Change of employment: A steady job is typically required for most mortgages. Changing jobs can negatively impact your mortgage approval. Typically, a lender will want to see you’ve been with your employer for at least six months.
Changes in requirements: The lender could change their requirements by the time you need the mortgage.
Property issues: The property you end up choosing may affect your mortgage approval. For example, the property is prone to climate change issues, was a crime scene, is near an energy development, etc.
History of late payments: Late payments may not show up on your credit report but will be discovered when the person approving or disapproving your mortgage looks into it.
Failed the mortgage stress test: The mortgage stress test is a federal government mandate used to determine if the borrower would be able to continue to make mortgage payments should interest rates rise. In order to pass the stress test, you must be able to show that you can pay the contract rate plus two per cent. (This only applies to federally regulated entities.)
What to Do When Your Mortgage Is Denied
Having your mortgage denied, especially after pre-approval, may leave you confused and scrambling for options. What can you do if your mortgage has been denied?Increase your down payment: Save more money to increase the amount you’re able to put down on a home. By increasing your down payment, you’ll reduce the mortgage amount and the risk to the lender, thus increasing your chances for approval.
Improve your credit score: Showing lenders that you can make your payments on time is the best way to ensure your mortgage is approved.
Pay off debt: Paying down your debts can reduce your debt-to-income ratio and improve the chances of you being approved.
Increase your income: This is easier said than done, but increasing your income will also raise your debt-to-income ratio and therefore aid in your mortgage being approved.
Get a co-signer: If you have bad credit, it’s possible to have someone with good credit co-sign on your mortgage application. This person would then be on the line for paying your mortgage if you can’t. However, this can be risky for the co-signer, and many people won’t want to co-sign for that reason.
Ensuring Your Mortgage Is Approved
If you want to give yourself the best odds possible when applying for a mortgage, try to do the following:Don’t take on any new debts like student loans, purchasing a new vehicle, or opening new lines of credit. If you need to finance anything for your new home, wait until your mortgage has been approved and you have the keys in hand.
Do not make any large withdrawals or deposits (without proof of its source).
Save money and continue to make your debt payments on time.
Being denied a mortgage despite being pre-approved is stressful and upsetting, but understanding why you were denied can help you take steps to be approved in the future. Following these tips and consulting with your mortgage lender can help start you on a path to ensuring your mortgage is approved.
