Can You Be Denied a Mortgage After Pre-Approval?

Getting pre-approved for a mortgage is an essential first step in the home-buying process. It gives you a clear understanding of your purchasing power and makes the mortgage approval process smoother. However, just because you've been pre-approved doesn’t guarantee final mortgage approval. There are several reasons why your mortgage could be denied after pre-approval.

Common Reasons for Mortgage Denial After Pre-Approval:

1. Change in Employment

Stable employment is crucial for mortgage approval. If you switch jobs before final approval, especially if you’re in a probationary period or change fields, this can negatively affect your mortgage. Most lenders require at least six months of employment with your current employer.

2. Lower Credit Score

Your credit score plays a vital role in securing a mortgage. If your score drops due to new debts, missed payments, or increased credit utilization after pre-approval, lenders may reject your mortgage application. Typically, a minimum credit score of 650 is needed for approval.

3. New Debts

Taking on large debts, such as financing a car or opening new credit lines before your mortgage closes, can hurt your chances. Wait until your mortgage deal is finalized and you have the keys before making major purchases.

4. Changes in Loan Requirements

Lenders may adjust their mortgage requirements, including changes in debt-to-income ratios or increased down payment requirements. These changes could affect your pre-approved mortgage, resulting in denial.

5. Appraisal Issues

Mortgage approval can sometimes be contingent on a satisfactory appraisal of the property. If the appraisal doesn’t match the value needed for the loan, you might face rejection.

6. Property Concerns

If the home has issues like being near energy developments or is subject to environmental risks, lenders may view the property as high-risk and deny the mortgage.

7. History of Late Payments

A history of late payments on credit cards, utility bills, or rent can raise red flags for lenders, even if these don’t appear on your credit report.

8. Failing the Mortgage Stress Test

The stress test ensures you can handle higher interest rates. If you cannot prove you can manage payments at your contract rate plus 2%, your mortgage may be denied.

9. Sudden Income Changes

A sudden drop in income, due to job loss or financial emergencies, can affect your ability to secure a mortgage, leading to denial.

What to Do if Your Mortgage is Denied After Pre-Approval:

1. Improve Your Credit Score
   Focus on raising your credit score by making timely payments and reducing your credit utilization.
2. Pay Down Debt
   Lowering your debt-to-income ratio can improve your chances of approval. Consider consolidating high-interest debts.
3. Increase Your Income
   Increasing your income can also improve your debt-to-income ratio, making lenders more likely to approve your mortgage.
4. Increase Your Down Payment
   Saving more for your down payment lowers the loan amount and risk for lenders, increasing your chances of approval.
5. Get a Co-Signer
   If your credit is unreliable, consider asking someone with a strong credit history to co-sign your mortgage. However, be aware that this is a significant risk for the co-signer.

How to Ensure Mortgage Approval:

• Avoid taking on additional debt before closing on your home.
• Don’t make large, unexplained deposits or withdrawals from your bank accounts.
• Continue making all loan payments on time.

What If CMHC Denies Your Application?

If you're making a down payment of less than 20%, your mortgage requires insurance through the Canada Mortgage Housing Corporation (CMHC). Even after pre-approval, CMHC can deny your application if they deem your employment unstable, your income insufficient, or the property’s condition unsatisfactory. It’s advisable to include a financing condition in your offer to protect yourself against mortgage denial, especially when making a lower down payment.

By understanding these common reasons for mortgage denial and taking steps to avoid them, you can ensure a smoother home-buying process and increase your chances of final approval.