Fact: A Mortgage Pre-Approval Does Not Guarantee You’ll Get the Loan

Over the years, we’ve learned that first-time home buyers have a lot of misconceptions and misunderstanding about the mortgage pre-approval process.

For example, some people believe that a pre-approval guarantees they will receive a final approval from the lender. But that’s not true at all.

Being pre-approved by a lender does not guarantee that you’ll get the loan. It simply means there is a chance you will get approved, if you can clear the underwriting process.

So you might want to keep the champagne on ice until you reach the actual finish line, which occurs at closing.

Mortgage Pre-Approval Is Not a Guarantee

To continue, let’s talk about what a mortgage pre-approval is, and what it isn’t.

• What it is: Mortgage pre-approval is a process where a lender evaluates your financial situation (including your employment, income, credit score, assets, and debts) to determine how much money they are willing to lend you toward a home purchase.
• What it isn’t: Mortgage pre-approval does not represent a commitment or guarantee from the lender, and it will probably state that very thing within the fine print.

When you get pre-approved for a home loan, your mortgage lender will examine your financial situation to determine if you are tentatively qualified for a home loan. “Tentatively” means that you are subject to further review and scrutiny, which will take place during the underwriting stage.

As part of the pre-approval process, you’ll probably receive a letter from the mortgage lender. The contents of these letters can vary. But they typically include (A) the loan amount and (B) any conditions you must meet in order to receive a final approval and funding.

Pre-approval letters often contain some version of the following statement:

“Please note that your loan will need to be officially underwritten and given official approval before funding of the property to take place. This is not a commitment to lend and you are not required to obtain a loan simple because you have received this letter.”

How the Process Usually Works

This will all make more sense if we zoom out and look at the broader process that takes place when a person gets pre-approved for a mortgage loan.

While the process can vary for a number of reasons, it usually works like this:

1. The home buyer chooses a lender to work with and gets pre-approved for a mortgage loan.
2. The home buyer provides additional documents as required by their lender, such as bank statements and tax returns.
3. The home buyer starts the house hunting process, finds a home they wish to purchase, and submits an offer to the seller.
4. The seller eventually accepts the offer, and both the buyer and seller sign a purchase agreement that serves as the contract.
5. The buyer then goes back to their lender with the signed and ratified contract, to complete the rest of the mortgage process.
6. The lender orders a home appraisal to find out how much the property is worth in the current market (i.e., due diligence).
7. A mortgage underwriter will review the borrower’s credentials, the loan documents, and the home appraisal report.
8. The underwriter might request additional information from the borrower at this stage, a fairly common occurrence.
9. If the underwriter determines that the borrower and property meet all guidelines, they’ll give it a green light to move forward.
10. The home buyer completes the closing process, pays for their down payment and closing costs, signs a lot of documents, and collects their keys.

The truth is most home buyers who get pre-approved for a mortgage end up closing successfully. Only a small percentage of home loans “fall through.” But borrowers should still understand the potential problems that can occur along the way, and how to avoid them.

Problems That Can Arise Along the Way

If you’ve been pre-approved for a mortgage loan, there’s a good chance you’ll get a final approval and receive funding to purchase the home. That’s the good news.

But it’s still not a guarantee. A lot of things could still go wrong during the time between the upfront pre-approval and the final closing.

Here are some potential problems that could occur along the way:

1. Changes in the borrower’s credit score

If the home buyer’s credit score drops significantly prior to closing, the mortgage lender might reconsider or even revoke their pre-approval. Lenders often conduct a second credit check shortly before closing. So be aware of that.

The fix: Paying all of your bills on time and limiting or avoiding credit usage could help to prevent a drop in your credit score.

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2. A job loss or change in employment

Losing a job or switching to a lower-paying job can affect the borrower’s income level and overall income stability. The lender might view this as additional risk and reconsider the loan terms or even deny the application.

The fix: After you’ve been pre-approved for a loan, try to keep your job and income situation as stable and consistent as possible.

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3. An increase in overall debt

If you take on additional debt during this process (financing a car, opening new credit cards, etc.), it will likely increase your debt-to-income ratio. If your DTI ratio gets too high, it could disqualify you from receiving the loan you’ve been pre-approved for.

The fix: Try to avoid major purchases and new credit lines until after you close.

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4. Problems with the property title

A “title” is a legal right to ownership of a property. During the mortgage process, a title company will search for problems including unresolved liens, ownership disputes, or title defects that could “cloud” the title. Such issues could put the loan on hold (pending their resolution) or even cause the lender to back out.

The fix: As a home buyer, there’s not much you can do during the title review aside from waiting it out. The good news is that title-related issues are rare during home sale transactions. But they can occur, so you should at least be aware of them.

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5. Appraisal is lower than the purchase price

Your lender will have the home appraised to determine its market value. They do this to ensure they are not lending more than the property is worth. If the home appraises below the purchase price and the seller won’t budge, it could interfere with your mortgage approval.

The fix: Use recent sales data to evaluate the seller’s asking price before making an offer. If the home still appraises low, ask the seller to lower the price to reflect the appraised value. Consider adding an appraisal contingency to your contract, to give yourself a way out.

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6. Failure to meet loan conditions

Mortgage pre-approval letters often come with conditions, such as providing additional documentation or maintaining a certain financial profile. Failure to meet these conditions can lead to a denial of the loan.

The fix: Read and understand your pre-approval letter. Ask questions if you don’t understand it. Satisfy all conditions or requirements identified by your lender.

These are not the only problems that can arise during the mortgage process, but some of the most common ones. The point here is to demonstrate two things: (1) pre-approval does not guarantee funding and (2) you have additional hurdles to clear after getting pre-approved.

5 Things to Take Away From This Guide

We’ve covered a lot of important information. So let’s wrap up with a quick summary. Here are five things to take away from this guide.

1. During pre-approval, the mortgage lender will examine your financial situation to determine if you are qualified for a home loan based on their qualification criteria. They’ll look at your credit score, debt level, assets, income, and employment. Those are the primary checkpoints.
2. The lender will pre-approve you for a home loan up to a certain amount. This will help you narrow your housing search to a specific price range, improving efficiency and increasing your chance for success.
3. But a pre-approval is not a commitment to lend you money. Nor is it a guarantee from the lender. It is simply the lender’s way of saying they will likely approve you for a certain amount, as long as you clear the underwriting process.
4. Home loan pre-approval is beneficial in other ways as well. It can help you spot credit, income, or debt-related problems that could prevent you from getting a loan. You could then take corrective action based on the type of problem you encounter.
5. It’s possible to be turned down for a home loan even after getting a pre-approval letter from a lender. So, in the interim, try to avoid making any large credit purchases, opening new credit accounts, changing jobs, or falling behind on bill payments. All of these things could hurt your chances of receiving a final approval.

Disclaimer: This information has been provided for general education and does not constitute financial advice. Every lending scenario is different because every borrower is different. As a result, some or all of the information presented above might not apply to your specific situation.