Can a Bank Deny a Loan If It Already Approved It?

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Bank customers use loans for a number of reasons, from funding a small business to buying a home. Getting a loan requires careful planning and comparing the various loan options available. But even if you've been preapproved or received formal notice of loan approval, the bank may still be able to deny your loan before you receive any money.

Reasons for Denial

Banks deny loans they've already started to approve, or expected to approve, for the same reasons that they deny loans from the beginning. These include inadequate credit scores, lack of a sufficient down payment, an unstable source of income or problems with the paperwork surrounding the loan application. Because a borrower's personal financial situation is subject to change suddenly and without notice, lenders need to keep their option for denial open to minimize risk.

Preapproval

When banks preapprove loans, they give good faith estimates of what type of loan they expect a borrower would be able to qualify for given the present circumstances. Preapproval is useful because it allows you to shop for a house with a strong sense of what you can afford. It also lets sellers know that you're serious about the process. However, the bank doesn't make a formal commitment when it preapproves a loan. The longer you want to complete the loan process, the greater the likelihood is that something will change on your credit report that can cause the bank to deny the loan.

Incorrect Information

After a bank offers formal loan approval, it may still be able to deny the loan. This can occur if you provide false information that the bank's loan officers later discover to be inaccurate. For example, reporting an incorrect income or using a false name to escape past credit problems usually gives the bank the right to deny your loan at any time according to the terms of the loan agreement you sign, which is a legal contract. Specific lending regulations vary by state, but borrowers who defraud banks face stiff penalties beyond loss of their loans.

Best Practices

Although you may not be able to guarantee that you'll get the loan you need, you can still take steps to help the process go more smoothly and prevent a late loan denial. Before applying for a loan, request a free copy of your credit report from one of the national credit-reporting agencies. This gives you a chance to make sure that recent debts and accounts are already on your credit report where the bank can discover them before issuing a preliminary decision on your loan application. Be straightforward and honest on your loan application, and avoid major financial transactions, such as taking on new debts, that may impact your credit report during the loan process.

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