If you took the preliminary step of getting a preapproval for your VA before shopping for a home, you are off to a great start. It’s the best way to get your foot in the door with sellers. It’s also the best way to shop within your means. You know what you can afford and what a lender will likely approve you for when you need the loan.
But, did you know that getting preapproved is not a guarantee of a loan? That’s right, you can get denied even after a lender lets you know how much loan you could get. Here’s why.
A Pre-Approval Isn’t Concrete
When a lender preapproves you for a loan, they go over the bare minimum documents. They will pull your credit and ask for your income and asset documentation. This is the first step and what the lender considers when they determine if they can preapprove you for the loan.
If your income adds up and it covers your monthly debts plus the new mortgage payment, you are likely in good hands. It’s even better if you show enough assets to cover the closing costs. Luckily, you don’t need money for a down payment as VA loans offer 100% financing.
The lender writes you a preapproval letter and you are on your way to shop for a home. But, that letter is not a guarantee of a loan. It just lets you and potential sellers know that the lender has good intention to give you a loan. Other factors are at play though.
The Home’s Value and Other Factors
The home’s value and condition play the largest role in the process. The lender cannot determine the value of a property that you have yet to choose. Even if you have chosen a property, only a licensed appraiser can determine the actual value for the home. Without that value, a lender cannot issue an approval without conditions.
While the property value is the largest condition, most lenders also issue other conditions, such as:
- Proof of employment at the time of underwriting and/or closing
- Proof of assets closer to the closing date
- Confirmation of the same debt ratio during underwriting
- Confirmation of the same income during underwriting
A preapproval letter is often good for two to three months. A lot can happen during that time, which is why lenders make the approval conditional. What if you change jobs during that time or you take on a new debt? That changes the whole landscape of the loan. The lender will have to go back to the drawing board and determine if you still qualify.
Reasons VA Loans Get Denied After Preapproval
As we discussed above, if any factors change in your loan file, a lender may have to start over. This could mean that they deny your loan. Following are the most common reasons for a denial after getting preapproved:
- Changing jobs – Each loan program has a specific amount of time you must be on the job. This also varies by lender. If you just changed a month ago, it could lead the lender to denying your application and forcing you to wait until you are on the job for 6 months or longer.
- Change in your credit score – If you pay a bill late, open a new account, or have multiple inquiries on your credit report, your credit score might drop. If it drops too much, it could affect your approval, causing the lender to deny your previously approved loan.
- Change in your debt ratio – If you take out a new debt, it changes your debt ratio. If you were close to the maximum already, the lender may retract their approval for the loan amount they already approved.
- Issues with the home’s value – A factor you can’t control is the home’s value. As we discussed above, if the value comes back lower than the intended loan amount, the lender cannot approve the loan.
The bottom line is that you should not bank on the fact that you have a preapproval. Consider it a good possibility that you can get a final approval. However, it relies on you keeping things the same as they are now and that the home is worth what the seller states. You can do your own homework, checking out the sales prices of recently sold homes in the area. This will let you know if you are in the right ballpark. A good real estate agent should be able to help you find a good deal as well.
If you do get denied after getting preapproved, don’t panic. Find out the reasons and then work on fixing them. A high debt ratio just means paying some debts down. A low credit score means fixing the issues that caused the score to drop. If you change jobs, you know ahead of time you’ll lose your preapproval; you’ll just have to wait it out until you are at the new job long enough for the lender’s liking.