Can my lender revoke my mortgage approval before closing?

By Gina Pogol
Mortgage Credit Problems Columnist

Dear Gina, I applied for a refinance and my application was approved. The lender pulled a copy of my credit report. Right before closing, my loan officer called me to tell me that the lender had pulled my credit again, that derogatory information had turned up, and that I can't refinance my mortgage with bad credit. Can they do that? - Mitch, Maryland

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Dear Mitch,

Sounds like you are a casualty of the Loan Quality Initiative, which Fannie Mae and Freddie Mac implemented to cut defaults on their mortgages. They pull a new credit report call a "Comparison Report" which quickly and easily highlights changes between the first report and the new refreshed report.

If bad credit has crept in, or if you applied for new credit, your closing can be delayed or you can be declined altogether. Here's what I recommend:

1. Ask to review the comparison report, and see what credit problems turned up to cause your loan to be declined. Is the new information correct? Or is it incorrect, for example a collection account for a debt you already paid?

2. If the information is correct, you know that you'll have to increase your score to its earlier level if you want to be approved. Your score could have declined because you were shopping for new credit and some inquiries turned up, or because you missed a payment while your refinance was in process, or because you used more credit (this could also happen if a creditor reduced your credit line), causing your utilization score to drop. This score makes up 30% of your total score!

3. Fix incorrect information. Ask your lender to perform a Rapid Rescore, which involves you providing proof that the entry is incorrect (if you made a payment on time that is being reported late, a copy of the canceled check or the online payment should do the trick).

4. If the report is correct, you'll need to fix the problem. For missed payments or an excess of inquiries, time is the only thing that does the trick. You'll need at least six months to recover from a late payment, and at least three to get past the inquiries. If you have a good relationship with the creditor, try calling and begging to have the payment reported as "on time." The worst they can do is say no, and you might get a "yes" if you are a long-time client with a good record. For excess utilization, you'll need to pay your balances down. You may be able to get a Rapid Rescore after doing this to save time.

You don't affect your score by pulling your own credit report, which means you can monitor it as much as you like and get your refinance accomplished when your score has recovered.

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