Can I Be Denied for an FHA Loan After Getting Pre-Approved?

Ten years ago, a reader asked us if they could get denied for an FHA loan after they’d been pre-approved by a mortgage lender. (The short answer is yes, by the way.)

That article has since generated thousands of views, which means this is a big concern for a lot of borrowers. So we’ve expanded this guide to provide even more clarity.

Here are five things you should know right up front:

• Mortgage pre-approval is a preliminary process that does not guarantee final approval.
• Pre-approval takes place before underwriting, which is a more thorough screening.
• An underwriter might identify issues that were missed during the application stage.
• A borrower’s financial situation could change in between the pre-approval and closing.
• You’re not fully approved for a loan until the underwriter marks you as “clear to close.”

Those are the highlights. Now, let’s take a deeper dive into the world of FHA loan processing.

FHA Loan Requirements Have Two Layers

FHA stands for the Federal Housing Administration. This government agency falls under the Department of Housing and Urban Development (HUD) and has been around since the 1930s.

The FHA does not lend money to borrowers. They play a “supporting role” in the mortgage process by insuring home loans made by lenders in the private sector. This insurance covers lenders for losses that can result from borrower default / failure to repay.

So there are two sets of requirements that can affect you when using an FHA loan:

1. Requirements issued by the FHA, such as debt ratios and documentation.
2. Requirements imposed by the mortgage lender, including credit scores.

A borrower applying for an FHA loan could be denied due to any of these requirements, even after they’ve been pre-approved. To understand why, you have to know what pre-approval is … and what it isn’t.

What Happens During a Mortgage Pre-Approval

Definition: Mortgage pre-approval is a preliminary assessment by a lender to determine (A) if a borrower is qualified for a loan (B) how much they can borrow based on their financial situation.

During the pre-approval process, the mortgage lender will review various aspects of your financial situation including your credit history, income, debt, and assets. It’s called “pre” approval because it happens before the house hunting process and the more thorough underwriting review.

Getting pre-approved for an FHA loan does not guarantee you’ll receive funding. That’s one of the most important points to take away from this guide. But it does offer some important benefits for home buyers.

Benefits of Getting Pre-Approved

As mentioned above, an FHA pre-approval does not represent a commitment or guarantee from the lender. And while it’s rare, a home buyer could still be turned down for financing even after getting pre-approved.

So you might be wondering: what’s the point?

The truth is mortgage pre-approval offers a number of benefits that could increase your chance of success when buying a home with an FHA loan.

• A Focused Home Search: Getting pre-approved by a lender will determine the maximum amount you are able to borrow. This allows you to tailor your home search to a specific (and realistic) price range, instead of wasting time looking at homes that exceed your price range.
• Stronger Negotiating Position: Sellers might be more likely to take your offer seriously if you have a pre-approval letter. It shows that you are a serious buyer with the financial means to back up your offer. This could make your offer more attractive compared to those without pre-approval.
• Faster Closing Process: An FHA pre-approval could also expedite the rest of the loan underwriting and approval process, since the lender has already assessed your qualifications. This is especially important in a competitive housing market where a faster closing time could make a big difference.
• Identifying Problems: Pre-approval helps identify potential issues with your credit or financial situation, and early on in the process. This gives you time to address such issues before you make an offer on a home, reducing the risk of complications.
• Increased Confidence: Last but not least, knowing that you’ve been pre-approved gives you the confidence you need to make an offer and negotiate with the seller. It provides peace of mind that you can likely secure financing once you’ve found the right home.

But It’s Not the Same as a Final Approval

As you can see from the above list, you can benefit from getting pre-approved for an FHA before you start house hunting. But it doesn’t mean that you’re home free, or that you’re guaranteed to close on the loan.

It’s possible to get rejected for an FHA-insured mortgage loan after the pre-approval. In fact, you could potentially receive bad news all the way up to the final closing process.

There are two stages of the process where your loan might be denied:

1. It can happen on the front end, during the initial application process.
2. It can also happen during the mortgage underwriting process.

Problems can also arise during the actual closing or settlement process, but this is rare. Usually, issues will be identified during one of the two stages mentioned above.

The point here is that pre-approval does not guarantee the final loan approval. The final approval comes after the FHA underwriting process, once the underwriter has given you a “green light” to close.

The Path From FHA Pre-Approval to Closing

While the mortgage process can vary, it usually goes something like this:

1. The buyer applies for a loan and gets pre-approved for a specific amount.
2. The buyer provides documents such as tax returns and bank statements.
3. The buyer finds a home, makes an offer, and signs an agreement with the seller.
4. The lender orders an appraisal to determine the home’s value and condition.
5. The loan file moves into the underwriting stage for a more thorough review.
6. The underwriter might request additional information to make a determination.
7. Ultimately, the underwriter will either recommend loan approval or denial.
8. If the borrower is approved, they’ll attend closing, sign documents, and get their keys.

The underwriter will do a more thorough examination of the borrower’s credentials, compared to the upfront review conducted by a mortgage broker or loan officer. So it’s possible for the underwriter to find negative factors that were overlooked during the pre-approval.

It’s also possible for the borrower to be turned down after initially being pre-approved. For example, if the borrower takes on additional debt after applying for the loan, it might trigger a rejection.

Related: Seven issues that can lead to FHA loan denial

The good news is that, in many cases, issues identified during the underwriting stage can be resolved prior to closing. Not every snag is a deal-breaker. So let’s talk about those resolvable scenarios next.

Dealing With ‘Conditions’ From the Underwriter

During the FHA mortgage process, the underwriter or loan officer might give you a set of “conditions” that must be resolved prior to approval and funding. This is commonly referred to as a conditional approval.

• If you can provide what the underwriter needs to resolve the conditions, you can move on to closing.
• If you cannot satisfy those conditions, the loan might be denied (despite the original pre-approval).

Key point: It’s also possible that you don’t receive any conditions at all. You might sail through the FHA underwriting process with no problems or additional requests. It’s a common scenario.

The only thing you can do at this point is stay in touch with your loan officer. If something comes up during the FHA underwriting stage, he or she will let you know. At that point, the ball is in your court to resolve the issue in a timely fashion.

Disclaimer: This information has been provided for educational purposes and does not constitute financial advice. Every mortgage scenario is different. This article includes generalizations regarding FHA underwriting, processing and approval that might not apply to your specific situation.