Pre-approval typically means that someone meets the necessary standards to obtain mortgage financing. Buyers who have a pre-approval letter are often more competitive on the real estate market than those who apply for a mortgage after making an offer on a property.
Both buyers and the sellers who select their offers tend to assume that pre-approval means that a transaction can move forward smoothly and with minimal complications. However, sometimes those with pre-approval are unable to follow through with a transaction because they cannot actually secure the mortgage for which they previously obtained pre-approval. These are some of the most common reasons that someone with pre-approval may not be able to obtain a mortgage.
A change in income
People never know when their employer might fire them or lay off multiple people at once. Downsizing and direct termination are both reasons why someone would have insufficient income and therefore be unable to qualify for a mortgage despite previously pre-qualifying.
An increase in their personal debt
Someone’s debt-to-income ratio and their total amount of outstanding personal debt will both factor heavily into their creditworthiness. When lenders finalize a mortgage, they will typically look at someone’s credit report very closely, including the current balances on all of their revolving lines of credit. Those preparing to buy a home often overextend themselves with a number of other purchases, which might ultimately lead to them being ineligible for a mortgage after making an offer on the property.
An issue with the property
Lenders typically only want to finance transactions where they can recoup the money that they invest. The home is the last line of defense against losses, as lenders can foreclose and assume ownership over the home. Therefore, the property question needs to be worth at least as much as the mortgage someone seeks to obtain. Scenarios where unexpected issues show up during inspection or where the appraisal comes in lower than anticipated may result in a lender refusing to finance a transaction even though they would still work with that buyer at a different property.
There is never any guarantee that a real estate closing will occur until someone has signed all the paperwork and the transfers have all taken place. Understanding what issues can potentially complicate real estate transactions may help both buyers and sellers better prepare themselves for what can be a very challenging process.