Pre-Approval Revoked After Finding a House. What Now?
A pre-approval is an assessment of your homebuying eligibility at a certain point in time.
The lender issues a pre-approval letter in good faith that nothing major will change with your situation.
But life isn’t always so predictable.
Sometimes you lose your job, rates go up, or something else changes with your financial picture. Or, the lender just screwed up. They rescind your pre-approval.
This can be especially painful (and costly) if you’re already under contract to buy a house.
What do you do next?
See if you can be re-approved. Start here.
Get Creative
It may seem obvious, but don’t accept your loan denial at face value. There may be another way to be approved.
Ask detailed questions about why you were approved but are now denied. Not every loan officer is equally skilled or creative. And different lenders can access different loan programs.
Call other lenders and explain your scenario and why you were denied. They might have a solution.
For example, your car was totaled and you had to spend some down payment cash to replace it. A knowledgeable loan officer would look into a zero-down USDA home loan or an FHA loan with down payment assistance, either of which could reduce your upfront cost.
Or you incurred a new debt since pre-approval. You could switch your program from a conventional loan to FHA, which allows for higher debt-to-income ratios.
An experienced loan officer can help you troubleshoot the issue and potentially save the deal. Unfortunately, it’s not always possible to get re-approved.
What If You Can’t Get Your Pre-Approval Back?
If you can’t reinstate your approval, it’s time to try to get out of the home purchase.
If you don’t close, the seller has the right to walk away with your earnest money. But there could be a way to back out of the deal.
When your real estate agent worked up the purchase contract, he or she should have added “contingencies.” These are conditions under which you can walk away without penalty.
You can use any valid contingency, not just one about financing.
Have your agent identify all contingencies that have not yet expired.
Some examples of contingencies are:
Financing contingency: This is the first contingency to check because it was designed for unexpected denials. However, you may have passed the expiration date or waived your financing contingency.
Inspection contingency: The buyer can cancel if the home inspection reveals a major flaw.
Home sale contingency: The buyer can cancel if they can't sell their home.
Appraisal contingency: The buyer can walk or renegotiate if the appraisal comes in lower than the purchase price.
Title contingency: An issue with property ownership can negate the deal.
Insurance contingency: If a home is not insurable, the buyer can cancel.
Sometimes there are no viable contingencies. You may still have options, though. It’s time to talk to the seller.
Ask the Seller to Be Let Out of the Contract
If you can’t leverage a contingency, it’s still worth asking the seller to be let out of the contract.
They may agree. Perhaps they can put the home back on the market. They may have a backup offer as well.
If you’re still stuck, start thinking about forfeiting your earnest money.
Forfeiting Your Earnest Money
You always have the option to back out of a home purchase, but sometimes it involves letting go of your earnest money.
It seems unfair, but earnest money is there, in part, to reimburse the seller for lost time. Each day the sale doesn’t close costs the seller money in interest, taxes, and insurance. The delay could even jeopardize their earnest money on a property they’re buying.
If you can’t reinstate your mortgage approval or use a contingency, it could be time to release your earnest money to the seller.
It’s one of the most painful things in real estate: not only did you lose the home, but you lost a portion of your hard-earned savings.
Still, this could be your only option. With time and planning, you can get back in the market.
Was My Lender to Blame?
Pre-approvals typically come with disclaimers that protect the lender if financing falls through. So there could be very little or nothing you can do legally.
Still, you could speak to the lender if the issue was known at the time of pre-approval. If they issued an approval anyway, you could ask for compensation. There’s no guarantee they will agree, though.
If nothing else, let the loan officer and his or her superiors know about the mistake. Leave a public review as well. At least you can help someone else avoid the same situation.
Don’t Give Up on Homebuying
Losing out on a house and possibly your earnest money could make you want to quit. But it maybe a setback you can recover from.
Work on the issue that caused your last-minute denial. Get approved again with a different lender. Have them do a full underwrite on your file this time, meaning an underwriter has reviewed all your documentation and fully approved everything except the property itself.
Then, shop for homes with confidence.
If you’d like to start over now, contact a reputable lender here.
Tim Lucas is the editor and Lead Analyst for MortgageResearch.com. Tim spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. He has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more.
