How can a bank deny my mortgage application after I've been approved?

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Shockingly, nearly 1 in 5 mortgage pre-approvals in Canada are denied when it comes time for final approval, leaving countless eager homebuyers high and dry just steps from the closing table. As President and Principal Broker at Clover Mortgage, I've witnessed firsthand the heartbreak prospective homebuyers face when their mortgage gets denied after receiving pre-approval.

Key Takeaways:

  • Getting pre-approved does not guarantee final mortgage approval - there are still several potential pitfalls ahead
  • Major changes to your employment, credit score, debt levels, or financial documentation can derail pre-approvals
  • Work closely with an experienced mortgage broker to proactively mitigate risks and smoothly navigate the process
  • Aim to keep your financial situation stable during the home purchase process after pre-approval
  • Be prepared to address any issues or provide additional documentation if requested by the lender or mortgage product.

1. Changes in Employment

Mortgages can commonly be denied because of an employment change. Although it entirely depends on the type of loan you are getting pre-approved for, most lenders will not be able to guarantee that you will receive your mortgage financing if you switch jobs. Many mortgages actually require the borrower to have at least two years of consistent income and a stable employment history in order to qualify.

While most job changes are frowned upon during your home purchase process, there are some exceptions to the rule. If you are switching employers but keeping the same career and similar or greater income level, you might not be endangering your mortgage pre-approval. For example, if you are working in software development and decide to transition to a different company for a higher pay, your mortgage approval will likely not be impacted.

Potential Job Changes That Could Impact Pre-Approval Lender's Typical Response
Switching employers in the same field with similar/higher pay May be acceptable if well-documented and income is stable
Promotion with substantial raise at current company Likely permitted if income can be verified
Career change to a different industry Pre-approval likely void - restart mortgage process
Gap in employment or extended leave Mortgage denial very probable due to lack of steady income

If you do have the option to hold off on your career transition, it is always safest to wait until you have signed both your ownership agreement and mortgage contract before making any changes. However, regardless of the career change or job transition you are considering, you should always talk to your mortgage broker first. A mortgage broker will be able to give you the most sound advice on whether it is in your best interest to get a new job once your mortgage funding has been released.

"Lenders want to see a solid two-year employment history because it demonstrates dependable income," says Rushi Parikh, Mortgage Agent Level 2 at Clover Mortgage. "Any gaps or transitions in employment raise red flags about your ability to sustain the mortgage payments long-term."

2. Negative Impacts to Credit Score

While your credit doesn't need to be perfect to qualify for a mortgage, big changes to your credit score can jeopardize your mortgage pre-approval. Every lender has a varying criteria for the credit scores they want to see in their borrowers. If your credit score drops suddenly, the lender that pre-approved you might not be willing to sign off on a mortgage and your deal could fall through. Thus, it is very important that each borrower knows their credit score following their pre-approval and understands how credit can be negatively impacted in a short time.

To illustrate the potential impact, let's examine a case study:

Credit Score Range Mortgage Rate (Example)
760+ 4.25%
700-759 4.75%
680-699 5.25%
620-679 6.00%
<620 Likely denied outright

A borrower pre-approved at a credit score of 725 (4.75% rate) could see their mortgage jeopardized or made significantly more expensive if their score fell to 680 (5.25% rate) before closing.

Even if you can still get approved for a mortgage with your new lower credit score, you might have to settle for a higher mortgage rate, which is less than ideal. In order to avoid any potential disappointments, it is best to continue to make your debt payments on time and not do anything that can drastically affect your credit in the 4 months leading up to your mortgage finalization. If you are worried about your credit, read this article containing tips on how to improve your credit score.

"Your credit score is one of the biggest factors that lenders scrutinize when granting mortgage approval," explains Steven Crowe, Commercial Mortgage Agent Level 1. "A significant drop in your score could mean getting denied outright or paying substantially higher interest rates. Protecting your credit is crucial throughout the home buying process."

3. New and Unexpected Debt

Another common reason for lenders to deny a mortgage following a pre-approval is because the borrower has procured a higher level of debt. In the time before you finalize your mortgage and home purchase, you should refrain from taking on any more debt than you currently have. Even a small increase in debt or a new line of credit could put your mortgage pre-approval in danger. An increase to your debt, no matter how insignificant, can alter your debt-to-income ratio and result in your mortgage being denied.

Here are a few common debt expenses that can arise unexpectedly:

  • Private Mortgages or High-Interest Loans: In certain situations, individuals might resort to private mortgages or high-interest loans due to poor credit history or urgent need for funds, leading to increased debt burdens. Anything from sudden job loss to emergency repairs can potentially push someone into the need for an emergency loan.
  • Credit Card Debt: High-interest rates on credit cards can lead to mounting debt if you are unable to pay off their balances in full each month, especially if unexpected expenses arise.
  • Alimony or Child Support Payments: Legal obligations, such as alimony or child support, can become unexpected financial burdens if not factored into your budget, or, if circumstances change suddenly.
  • Tax Liabilities: Unanticipated tax bills due to errors in tax filings, changes in tax laws, or underestimation of taxes owed can result in unexpected debt that you may struggle to pay off.

Before you rack up your credit card or take out a new loan, it is recommended that you speak to your mortgage broker about the decision. A good mortgage broker will almost always advise you to wait until your paperwork is signed before you make any sudden financial movements.

4. Lender Guideline Changes or New Requirements

It is important to remember that even when a borrower has already been pre-approved by their lender, they are not exempt from any new guidelines or requirements that the government or individual lenders implement. If a lender changes their minimum credit requirement from 600 to 620, borrowers with a lower credit score will lose their mortgage pre-approval. Although this may sound frustrating, a good mortgage broker will likely be able to get you approved with another lender whose restrictions are slightly different.

Other changes to lender requirements or qualification guidelines that could cause your mortgage to be denied after pre-approval are debt-to-income guideline changes and variations to the amount of savings expected of a buyer. Learn more about what is a debt-to-income ratio.

5. The Appraisal Comes in Too Low

If you are purchasing a home straight from the builder, in most cases you won't need to have the home appraised, and the banks will provide you with a mortgage loan based on the purchase price that you are paying for it. If you are buying a pre-existing or pre-lived in home, then your mortgage lender will almost always require an appraisal that is conducted by an accredited appraiser of the lender's choice.

The appraised value of a property impacts its loan-to-value (LTV) ratio, which in turn can impact the down payment requirements you must abide by. If the property's appraised value is lower than anticipated, it might increase the LTV ratio beyond what the lender is comfortable with, which means you may be forced to increase your down payment to meet the required LTV ratio for the loan.

A good mortgage broker will help ensure that the appraisal for your home is ordered on time and from the right appraisal company in order to help you maximize your chances of having a smooth and easy time with your mortgage financing.

Unforeseen external situations like this demonstrate why borrowers should always work with a mortgage broker and industry expert who can help them navigate such unexpected circumstances.

Victoria Ishai, an experienced mortgage agent, advises: "Buyers should never assume an appraisal will match the asking price. There are so many variables that go into an appraisal value. Having an agent who knows the market and can set realistic expectations is invaluable when it comes to avoiding appraisal surprises that could derail your mortgage."

Tips To Ensure Your Mortgage Doesn't Get Denied

A common question that is asked by borrowers is how they can ensure their mortgage doesn't get denied following their pre-approval. It may seem silly, but the best answer is to keep doing exactly what you were doing before you pre-approval. Since you already got approved for a mortgage, all you need to do is stay in the same financial standing as you did before your pre-approval. A mortgage pre-approval typically lasts for 120 days so your job as a borrower is to keep your finances steady until you purchase your home. Mortgage lenders and mortgage brokers will do everything in their power to see as many of their pre-approvals make it to closing, so you don't have to work too hard.

Here are some additional tips for borrowers who want to make sure their mortgage will not get denied last minute:

  • Embrace Financial Discipline: Avoid opening any new credit lines and minimize your outstanding debt obligations in the last 90 to 120 days before your mortgage closes. The goal is stable, predictable finances.
  • Prepare For the Worst, Budget Ahead: Lenders may underestimate closing costs, so setting aside a financial cushion (ideally 1.5% of the purchase price) can prevent surprises. Thoroughly review your lender's estimates.
  • Consider a Skilled Co-Signer: If your financial profile is borderline, adding a reputable co-signer can provide lenders added reassurance to honor pre-approvals.
  • Job? Stay Put: Unless your mortgage broker advises otherwise, avoid any voluntary employment transitions after pre-approval that could destabilize your income stream.
  • Document, Document, Document: Maintain pristine paperwork for all your income, assets, debts, and job details to expedite lender verification. Provide a satisfactory paper trail.
  • Nurture Your Credit Standing: Established credit behavior and strong credit scores consistently rank among the top lender priorities. Protect your hard-earned rating vigilantly.
  • Open Communication with Your Mortgage Team: Transparency is paramount. Proactively raise any potential red flags with your mortgage broker while there's time to correct.

Frequently Asked Questions

What happens if my mortgage loan is not approved before the closing date?

If your mortgage loan does not receive final approval from the lender before the scheduled closing date, you risk not being able to finalize the home purchase. The seller may attempt to keep your earnest money deposit or even take legal action. Having your mortgage denied at this stage can derail the entire real estate transaction, so it's crucial to work closely with your mortgage broker and real estate agent to avoid any last-minute issues.

Why do lenders scrutinize my bank accounts during the approval process?

Lenders will thoroughly review your bank statements and account activity to verify your income sources, savings patterns, and overall financial behaviors. Any large, unexplained deposits or withdrawals could be seen as risk factors and prompt additional documentation requests. Maintaining stable bank accounts is important.

How does my credit report and credit score impact mortgage approval?

Your credit report and credit score are critical components in a lender's approval decision. Most lenders have specific credit score requirements, and if your score drops too low after pre-approval, you may face denial or higher interest rates. Additionally, new negative items on your credit report like late payments can raise red flags.

What role does a real estate agent play in avoiding mortgage denials?

An experienced real estate agent can help set realistic expectations around properties' potential appraised values based on their local market expertise. Since a low appraisal that increases the loan-to-value ratio is a common reason for mortgage denials after pre-approval, having an agent provide guidance on the home's projected appraisal is invaluable.

What is considered a satisfactory bank appraisal for mortgage approval?

A satisfactory bank appraisal has a property value that is at or above the agreed purchase price. If the bank's appraiser values the home lower than the price, it could lead to the lender denying the mortgage or requiring a larger down payment to compensate for the increased loan-to-value ratio.

What if my mortgage is denied right before the closing date? What are my options?

Having your mortgage denied at the last minute can be a nightmare scenario. At that stage, your options may include pursuing a co-signer, finding another lender (with the help of a broker), or unfortunately walking away and losing any earnest money deposits already paid. Building a financial cushion for unexpected closing expenses can provide a buffer as well.

How much do credit scores really impact my ability to get a mortgage?

Your credit score impacts both your chances of mortgage approval and the interest rates you'll qualify for. Most lenders have score thresholds, where buyers with scores below a certain benchmark (often in the 600s) face likely denial or extremely high interest costs. Maximizing your credit score gives you much more bargaining power.

Final Thoughts

A mortgage denial is one of the biggest reasons real estate deals fall through and why so many borrowers turn to Clover Mortgage for help with a quick closing last-minute mortgage. It can also be incredibly frustrating for an already approved borrower to have their mortgage stripped from them at the very last minute, because in can mean that they can lose the property and deposit.

Even if you have just been pre-approved from your bank and haven't yet started looking for a house or a mortgage, working with a mortgage broker is in your best interest. At Clover Mortgage, we want to make sure you are well-prepared and set-up for a successful mortgage transaction, so that you never have to worry about losing out on your dream home!

Call or text us today at 416-674-6222or email us at info@clovermortgage.ca to speak with a qualified Clover Mortgage broker.

Steven Tulman
Written By Steven Tulman
“Making the process of getting a mortgage an easy and enjoyable experience for every Clover Mortgage client!”