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. Once you are issued a pre-approval there are some common mistakes and pitfalls that 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 new employment may be 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 prior to and during the mortgage loan process. All large deposits must be documented showing 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 are 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 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 bank statements have an accumulative annual total of overdraft charges; expect to thoroughly explain the reason for any overdrafts.

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 as well as houses in point of sale cities require funds to be put in escrow or simply may not be habitable in their current state. If the seller does not complete the required repairs or allows the buyer to complete the repairs, the only option is a rehabilitation loan. Typically, renovation loans have stricter guidelines than standard loans (usually higher credit scores and tighter debt ratios). Prior to making an offer on a house, verify the loan types the pre-approval includes.

Keep an open line of communication with your loan officer and discuss any major financial changes between the mortgage pre-approval being issued and the loan closing. The financial institution having an accurate depiction of your financial situation is key to your final loan approval. Having a mortgage denied, especially after being issued a pre-approval is devastating and heartbreaking.

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

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