Securing financing is often the most stressful part of buying a home. You have to meet requirements, provide documentation, and crunch a lot of numbers. Most of the time, you’re doing that while house hunting or negotiating an offer. It’s a busy time during which you have to juggle a lot of things.
One thing that can get confusing is can a mortgage be denied after approval. Most people know that preapproval doesn’t mean approval and that they may not get the financing they need even if they are preapproved. But not many people know that a mortgage can be denied even after final approval. The key to avoiding this is to understand what’s involved with mortgage approval and how to be prepared.
Preapproval vs Approval
There are two stages of securing financing for a home purchase:
Mortgage Preapproval
Mortgage preapproval is usually the first step. Although some buyers skip this step, it is highly recommended. It gives you a good idea of how much your lender might approve, what range of homes you can afford to look at, and it makes your offers more convincing to sellers. For preapproval, your lender will review your financial situation, including income, debts, credit score, and assets, to determine how much they’re willing to lend you. Preapproval usually only takes a few hours. Although it gives you a good indication of what you can afford and shows sellers that you’re a serious buyer, it’s conditional on additional documentation and more intensive examination by your lender.
Final Approval
Final mortgage approval happens after you’ve made an offer on a property. At this point, the lender will verify your financial documentation, appraise the property, review the property’s title, and confirm that nothing has changed since your preapproval. Once you get your final approval, you can close on the deal.
Can a Mortgage Be Denied After Preapproval?
Yes, a mortgage can be denied after this stage. Preapproval is based on a limited amount of information about your finances at that point in time. Common reasons for denial after preapproval are:
- Change of employment: lenders look for steady employment (at least six months with the same employer). If you change jobs during the preapproval period, this will be more closely scrutinized. However, if your new job is in the same field, they may make an exception.
- Low credit score: lenders prefer a minimum score of 650. Although you may have had a higher score when you were preapproved, it may drop if you take on additional debt or miss a payment.
- Failed mortgage stress test: A mortgage stress test determines whether you could continue to afford your mortgage payments if mortgage rates increased. This test is now a requirement for approval.
Can a Mortgage Be Denied After Final Approval?
Once you’ve found a property you like, you’ve put in an offer conditional on financing, and you’ve given your lender the rest of your documentation, the finish line will be in sight. However, you may still spend some time wondering, “Can a mortgage be denied after final approval?”
Unfortunately, this does happen. Fortunately, it’s rare. These are the most common reasons for a mortgage being denied after being approved:
- A change in employment, loss of job, new debt, or missed payments on existing debt: this can happen right until the morning of your closing date, as lenders do final checks.
- Fraud, misrepresentation, or identity theft: if the lender discovers that you provided false information on your application, they can (and will) deny your application even if it’s at the last minute. If they suspect identity theft, they may freeze your funding until the matter is resolved.
- Title problems: a title search could reveal that there are liens against the property or previously undisclosed people who have a claim to it (ex, surprise heirs who emerge from the woodwork). If that’s the case, your lender won’t be able to approve the full amount of the loan.
- Appraisal issues: if the property’s appraisal comes in lower than the loan amount, your final approval could be denied unless you have the funds to make up the difference.
- Property issues discovered at the final walkthrough: if there’s been significant damage to the home between the home inspection and the final walkthrough, your lender may reconsider. The damage would have to be so severe that the property value has changed.
A mortgage is not truly safe until the funds are advanced to you. Until that time, protect your finances diligently:
- Keep your job even if you get an attractive new offer. If your new employer really wants you, they’ll be willing to wait a few weeks.
- Make your regular debt payments a few days early. Be vigilant about never missing a payment, even if you know there’s a grace period.
- Don’t take on any new debt, not even financing for appliances.
- Avoid opening new credit accounts, even if you don’t use them while waiting for your deal to close.
- Keep all your documentation handy in case your lender needs additional information.
The time between final approval and closing can be stressful. But if you’re prepared and careful, the process will be smooth.
Can CMHC Deny a Mortgage?
If your down payment is less than 20%, your mortgage is considered high ratio. High ratio mortgages require mortgage loan insurance, which protects your lender in the event of a default.
Most mortgage loan insurance is provided by the Canada Mortgage and Housing Corporation (CMHC), although it’s also offered through Sagen and the Canada Guaranty Mortgage Insurance Company. (CHMC is often used as shorthand for all three organizations)
After your lender is satisfied with your income, credit, and debts, they submit the file to CMHC for approval. CMHC then conducts its own assessment, looking at your income stability, debt ratios, credit history, the property type, and the appraised value of the property.
CMHC can approve the application, approve it with conditions, or deny it altogether. Conditions might include a higher down payment, coverage of the gap between the appraisal value and purchase price, or asking for additional documentation. If any of those fail, the mortgage may still fall through even if the lender was prepared to approve it.
Can a Mortgage Be Denied After Approval?
If you’re wondering, “Can a mortgage be denied after approval?” you’re asking the right questions. Although it can happen, it’s not the norm. Preparation is key, as is keeping tight control of your finances while waiting for final approval. The vast majority of final approvals do go through to closing!
