Once you’ve decided to buy a home, you should get a mortgage pre-approval so you know how much you can afford to spend. But does a pre-approval mean you’ll get a mortgage on a home you want to purchase?
Unfortunately, it doesn’t.
There are several factors that contribute to successfully closing a real estate deal. In a competitive marketplace, another buyer may outbid you. But there’s also the possibility your financing could fall through.
The reality is that simply obtaining a mortgage pre-approval doesn’t guarantee you’ll get financing. A pre-approval means a lender has reviewed your finances and assessed how large of a mortgage you can afford (to see how much you can afford, check out our mortgage affordability calculator). The pre-approval also provides you with a guaranteed interest rate if the mortgage is approved within the agreed time period. If you choose a variable-rate mortgage, the only guarantee is that the discount to prime will stay the same if interest rates rise.
But a pre-approval isn’t a binding agreement between you and the lender. It’s completely possible that a lender denies your mortgage application because of any changes to your circumstances after your finances were initially reviewed. Below are some instances when your mortgage application can be denied.
The first instance that could put your mortgage approval at risk is a change in your employment status. If you change roles, move to another company, or become self-employed, it could affect whether or not the mortgage will be approved. Maintaining the same employment status and salary shows your financial situation is stable. So if you’re being considered for a different role or thinking about changing jobs, you should mention this to your lender as soon as possible.
When you find a new home, you’ll likely start looking at home furnishings or consider purchasing a vehicle if you’ll need to commute. But if you decide to get a car loan or buy items on your credit card and you don’t intend to pay off the balance in its full, your debt load will also increase your total debt service (TDS) ratio. An increase in your TDS ratio could result in your lender denying your mortgage. If your application is denied, you can get a guarantor to co-sign a mortgage. This can often be done by a parent or relative.
Lenders will sometimes want to appraise your property. If the appraisal shows the value is lower than your purchase price—which may happen after a bidding war—the lender could deny the mortgage or require you to put down a larger down payment.
The bottom line
The path to home ownership can sometimes be complicated. But if you know what can stop you from getting final approval of your mortgage, you can avoid the pitfalls and be a step closer to getting the home you want.