Can a Pre-Approved Loan Be Denied? Understanding the Process and Potential Risks
Yes, a pre-approved loan can be denied. While the loan is pre-approved based on initial information, there are several factors that can impact the final approval. This guide will help you understand the process, reasons for denial, and how to avoid them.
Common Reasons for Denial
A pre-approved loan can be denied under certain circumstances, with the most common reason being that the property does not appraise at the asking price. An appraisal is a professional evaluation of the property's value. If the property value is lower than the purchase price, the bank may not be willing to finance the entire amount as requested. In such cases, the seller should either lower the price or the buyer may choose to withdraw the offer and look for a different property.
Another reason could be changes in the buyer's financial situation, such as a job loss during the escrow period. Employment verification is conducted multiple times, and any significant changes in the financial picture can affect the loan approval.
Steps in the Pre-Approval Process
Being pre-approved for a loan is a crucial step in the home-buying process. It involves the following steps:
1. Initial Application and Assessment
The first step is to complete a mortgage application. Based on the information provided, a borrower is deemed creditworthy, and a certain monthly housing expense is estimated. This is translated into a house price estimate, considering factors such as taxes, insurance, and current interest rates.
2. Verification of Payment Amount
Once a house of interest is found, it is important to check the county taxes and the current interest rate to determine the monthly payment accurately. Lenders may require a quote from an insurance agent and HOA dues (if applicable) to ensure the buyer is preapproved for the amount needed for the specific property.
3. Financial Underwriting
At the next stage, the borrower must submit bank statements, payroll statements, and tax returns. The lender verifies the financial information, checks the credit history, and confirms employment. Based on this analysis, the lender determines how much of a mortgage the borrower would be approved for.
4. Property Underwriting
After the buyer identifies the property, it must also undergo an approval process. This includes having a property under contract, full inspections, and appraisals. If significant repairs are needed, the seller must complete them before final approval.
5. Loan Closing and Final Approval
On the day of closing, loan forms are sent to the Title Company, which must be signed and notarized. These forms are reviewed by the lender, and the funds are then wired from the lender to the Title Company. The Title Company, in turn, wires the funds to the previous lender to pay off existing liens, the seller, and any brokers involved. The lender may also re-verify the employment to prevent any last-minute issues such as job termination.
Changes and Their Impact
It is possible for changes to affect a loan's approval, particularly if a new transaction alters the borrower's debt-to-income ratio. Adding a new car loan, credit card debt, or even opening a new credit card can impact financial stability. Borrowers should avoid such expenses once pre-approved to maintain the best chance of final loan approval.
Conclusion
A pre-approved loan offers a significant advantage in the home-buying process, but it is not a guarantee of final approval. Understanding the steps involved and potential risks can help home buyers navigate the process with confidence and reduce the likelihood of a loan denial.