When it’s time to purchase a home, one of the first things you should do is get pre-approved for a home loan. In this highly competitive market, mortgage pre-approval is “the ace up your sleeve” because it emphasizes that you are serious about buying a home and have the finances to back you up.
While having a pre-approval letter gives you an advantage at the negotiating table, it’s not a guarantee that you’ll close the loan.
That said, it may surprise you to learn that lenders may turn you down for a loan even if you get pre-approved. Let’s look at some of the reasons why this may happen and how to prevent it.
The pre-approval process is quite similar to final approval, wherein lenders gather your financial documents and see where you are at. Based on all your documentation, a mortgage professional can tell you what size of the loan you are qualified for and the interest rate you may get.
You can also receive an estimate of what your closing costs will be. The question is, why can you get denied even after pre-approval?
Significant changes can occur with your financial situation between pre-approval and closing. This is the main reason for getting turned downed after pre-approval.
Lenders will go through all your financial documents once more as you approach closing day. If they discover that your creditworthiness or financial standing has changed significantly since pre-approval, they can use this as a basis for denying your loan.
Here are the top reasons why your loan can be in jeopardy even after pre-approval.
Credit reports pulled during pre-approval are usually good for 120 days. If you don’t close a loan within that time, lenders would need to pull a new credit report once more.
If you’ve been late on payments, closed any of your accounts, or have taken on new debt since pre-approval, your credit score can take a hit and cause a denial on your loan.
Lenders may check if you have incurred additional debt that may affect your DTI. For example, after pre-approval, buying a new car is not a good idea since the new loan can bump your DTI above the limit.
Mortgage approval requires a history of stable and reliable employment. Changing jobs during the home buying process can impact your final loan approval.
There’s still hope, though! If you can prove that you have the same salary or higher or get a job within the same industry, you can still close the loan.
If you go from salaried to commission or completely change careers, lenders may have a hard time judging your future stability.
Making financial changes can sabotage your pre-approval, so it’s better to know what you should do and not do between pre-approval and closing.
That said, the best thing you can do between pre-approval and closing is to keep things as they are from a financial standpoint.
Do you need help in closing a home loan fast? Our loan officers can guide you on what steps to take to close quickly and with ease. Give our loan specialists a call or contact us through our website to learn more. We’re always here to help.
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The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Keeping Current Matters, Inc. does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Keeping Current Matters, Inc. will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.
There are three main home sale contingencies: home inspection, appraisals, and mortgage approval.
These contingencies are meant to protect you, the buyer. They allow a legal way to back out of the sale should something go wrong during the closing process.
Let's take a closer look at the types of contingencies and how they usually work.
A home inspection contingency, sometimes called a due diligence contingency, is part of every home sale unless you waive it. We encourage you never to waive it under any circumstances.
Its primary purpose is for a professional home inspector to reveal any flaws in the home so that you can re-negotiate or cancel the contract based on the findings.
Here's a few examples of what that might look like:
The appraisal contingency ensures that you can terminate the contract if the home does not appraise at that minimum amount. In most cases, your earnest money will be refunded if that occurs.
This type of contingency can also include terms that allow you to buy the home at the original price despite the low appraisal. Alternatively, you can request a lower selling price.
However, keep in mind that if you are financing the purchase with a mortgage, your lender might only cover the appraised cost.
Just like a home inspection contingency, the appraisal contingency shouldn't be waived.
A mortgage contingency states that the offer is dependent on you securing financing to purchase the home. It's beneficial in that it gives you a legal way out of the contract should you be unable to get approved for a loan.
However, sellers are often wary of accepting these types of offers as it lacks the assurance of financial backing.
Note that this contingency has a time limit for getting a home loan. If you cannot get approved on time and haven't terminated the contract before time runs out, you'd still be financially obligated to purchase the home.
So while this contingency is beneficial, you'd be better off getting approved for a home loan before making an offer.
A home sale contingency is when your offer is dependent on the sale of your current home. There are two types of home sale contingencies. We'll explain them below.
A sale and settlement contingency happens when you, the buyer, haven't yet received or accepted an offer on your current home. In this situation, the seller of the new home will be able to market their home to other buyers despite accepting your contingent offer.
Should another buyer make an offer, you'll have about 24 – 48 hours to remove the contingency and move forward with the purchase. If you're unable to remove the contingency, your sale contract is terminated, and you'll get your earnest money back.
A settlement contingency is when you, the buyer, have accepted an offer on the home you're currently selling, and you have a closing date on the calendar. This type of contingency typically doesn't allow the seller to keep marketing the home.
As long as your home closes on the date listed in the offer, the sale contract remains valid. But if the property doesn't close on time, the contract can be terminated, and you lose the home.
Did you find this article helpful? Please share it! And please contact us for more mortgage advice and pre-approval answers.
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“Total housing inventory at the end of December totaled 1.07 million units, down 16.4% from November and down 23% from one year ago (1.39 million). Unsold inventory sits at an all-time low 1.9-month supply at the current sales pace, down from 2.3 months in November and down from the 3.0-month figure recorded in December 2019. NAR first began tracking the single-family home supply in 1982.”
(See graph below):
Be patient during your home search. It may take time to find a home you love. Once you do, however, be ready to move forward quickly. Get pre-approved for a mortgage, be prepared to make a competitive offer from the start, and know that a shortage in inventory could mean you’ll enter a bidding war. Calculate just how far you’re willing to go to secure a home and lean on your real estate professional as an expert guide along the way. The good news is, more inventory is likely headed to the market soon, Lawrence Yun, Chief Economist at NAR, notes:
"To their credit, homebuilders and construction companies have increased efforts to build, with housing starts hitting an annual rate of near 1.7 million in December, with more focus on single-family homes…However, it will take vigorous new home construction in 2021 and in 2022 to adequately furnish the market to properly meet the demand."
Realize that, in some ways, you’re in the driver’s seat. When there’s a shortage of an item at the same time there’s a strong demand for it, the seller is in a good position to negotiate the best possible terms. Whether it’s the price, moving date, possible repairs, or anything else, you’ll be able to request more from a potential purchaser at a time like this – especially if you have multiple interested buyers. Don’t be unreasonable, but understand you probably have the upper hand.
The housing market will remain strong throughout 2021. Know what that means for you, whether you’re buying, selling, or doing both.
If you are ready to start your buying or selling process
give me a call at 562-477-2963 - I´m happy to answer all your questions.
