When you’re ready to purchase a home, one of the first things you’ll need to do is get pre-approved for a mortgage. A pre-approval letter is critical, especially in a competitive market, because it shows sellers you’re serious about buying a home and that you have the financial means to do it. 

While having a pre-approval will make you more competitive, it’s important to remember that it’s not a guarantee you’ll receive financing. During the application process, your lender will examine certain factors like your credit score, income, employment, debts, and assets. If any of these criteria change between pre-approval and closing, your loan could be in jeopardy. Here are a few reasons why that might happen. 

A negative hit on your credit 
You don’t need perfect credit to obtain a pre-approval, but you will need to meet your mortgage credit requirements as well as credit guidelines set by your lender. Because of this, it’s important that a buyer has a solid understanding of how credit scores impact mortgages. 

“The credit report pulled during pre-approval is typically good for 120 days,” said Jim Thelen, mortgage loan originator with Lake Michigan Credit Union. “If you aren’t able to find a home and close within that timeframe, we’ll need to pull a new report. If you’ve been late on any payments, closed any accounts, or taken on any new debt in that time it could impact your score and your mortgage approval.”  

An increase in debt 
While your lender typically won’t pull a new credit report within 120 days, most lenders still perform a “soft pull” before issuing a clear to close. The reason for this is not to get a new credit score, but to see if the borrower has incurred additional debt that may affect their debt-to-income ratio (DTI).  

“Let’s say after being pre-approved, a buyer’s car breaks down and they need to purchase a new one,” said Thelen. “If they’re taking on a new loan and that loan bumps their DTI above the allowed limit, they may no longer qualify. However, if the borrower is simply exchanging one car loan for another, it shouldn’t be a problem as long as the monthly payments are similar.”

Thelen says a common issue he sees is buyers taking on new debt for things like furniture or appliances for their new home, but he strongly suggests holding off until after the closing date.

“Depending on your overall financial picture it doesn’t necessarily mean you’ll be denied, but it is something the underwriter will review prior to issuing an approval to close, which could delay the closing,” he said. 

A change in employment
To be approved for a mortgage, you’ll need to show a history of reliable, stable employment. Changing jobs during the home buying process can potentially cause closing delays and, in some cases, it can result in your loan being denied. However, the impact of a job change depends on a number of factors, including your lender’s criteria, your mortgage program’s requirements, your financial situation, and the details of your new job. 

Lenders are less likely to balk at a job change if it’s within the same industry and comes with a similar or higher paycheck. For instance, if you’re a nurse and you accept a job at a new hospital performing similar duties, it likely won’t case a problem as long there isn’t a drastic change in salary. However, if you completely change careers, or go form a salary position to one that is based on commission, it makes it hard for your lender to judge your future stability. 

Other potential issues
Another important “change” to avoid during this time is any undocumented transactions in your bank account. For example, a large cash deposit can be a big red flag unless you’re able to clearly document where the funds came from.

“Income from your employer or an IRS tax refund won’t draw much attention because the reference for those deposits is clearly shown,” said Thelen. “However, if your grandparents gift you $8,000 towards your down payment, you can’t just arbitrarily deposit the cash into your account and call it good. There has to be documentation.” 

Why is this important? Because when a lender notices a large cash deposit in your account, they’ll need to make sure that you didn’t take out a new loan or debt, that you don’t have unreported income, and that you acquired the funds from an acceptable source.

Because any type of “change” can cause potential hiccups during the mortgage process, most experts advise that borrowers try to maintain the status quo form pre-approval to closing. However, sometimes change is unavoidable, and if that’s the case, Thelen says borrowers should immediately contact their lender to see how their loan may be impacted. 

“The education piece is so important,” he said. “I want borrowers to fully understand their mortgage requirements and be aware of the potential pitfalls. That’s why my initial consultations can sometimes last a couple of hours. I want to establish good communication and a trusting relationship with my clients so that when issues pop up or questions arise, they’ll immediately call and we can work to keep things on track.” 

For a list of reputable local lenders, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.