Jonathan Alphonso
4 min readMay 10, 2024

Consequences of Mortgage Loan Rejection Before Closing Date

It’s a bad situation when a mortgage application gets rejected shortly before the closing date. It’s stressful for a potential home buyer, and there are consequences. Sometimes, people have too much debt to get their loans accepted by a traditional lending institution. Other times, their credit score is unacceptable. However, there are ways to mitigate these risks and use alternative solutions like private lenders.

Impact on Homebuying Timeline

Even if a mortgage loan is rejected before the closing day, the buyer might still want to purchase the property. If there’s an issue, a buyer can negotiate a contract extension. Several items need to be considered. Unexpected property issues often lead to last-minute financial changes, such as incomplete paperwork. Other reasons include buyers needing to sell their present home.

It’s important to remember that if you’re buying a house and you can’t close the deal, the seller can assume you’re in default and sue for the deposit and any loss they suffer by reselling the property. If you ask for an extension, the buyer will need to pay the seller’s legal fees and any additional costs, like moving expenses, that result from the request.

Financial Ramifications

Several consequences can affect a potential buyer’s pocketbook if a mortgage doesn’t close.

  • Credit scores can be affected when a mortgage application is rejected. When you apply for a loan or mortgage, it’s called a hard query on your credit. Rejections and repeat applications to the credit bureaus can create a strike on your credit report and score, damaging a person’s ability to get credit.
  • If the loan is rejected, additional expenses may have piled up, including property inspections, credit reports, and home appraisals. The person involved generally doesn’t get the money back.
  • If a mortgage is cancelled, you may be stuck with the fees associated with cancelling temporary housing, storage and moving.

Exploring Alternative Financing Options

Alternative financing options are one solution if a mortgage is rejected. There are several things to keep in mind here, like the fact that these types of mortgages often come with a higher interest rate than traditional banks.

Private lenders have a more streamlined process. Even though they can approve a private loan much faster than a conventional bank, you still need to negotiate with the seller.

Remember that a private lender can finance a mortgage in days, while traditional Banks can take weeks or even longer. Traditional banks have stricter criteria. For example, they look for a consistent employment history of several years, while a private lender will even consider self-employed people.

Strategies for Prevention

Implementing several strategies can help you avoid mortgage loan denials.

Staying on top of your credit score is an excellent way to avoid the whole problem in the first place. Equifax has some excellent suggestions for improving your score if you think it might need to be higher so it doesn’t get rejected. Even though there’s no one-size-fits-all solution, you should avoid closing any old credit accounts even if they’re paid off. One factor used in determining your credit score is the “average age of accounts.”

Getting pre-approved is the best way to avoid the whole issue in the first place. It’s a way to define your budget, telling lenders that all your financial accounts are in order. It’s a good starting point but doesn’t guarantee final approval. If you keep your financial situation stable during the process and avoid changes to your debt levels and employment, you’re on stable ground to prevent a rejection.

If you’re considering going with a more traditional lender, there are some other solutions. Those include reducing your debt-to-income ratio. This involves paying down high-interest-rate debts like credit cards and avoiding big purchases.

Seeking Legal Advice

Getting legal advice from a qualified lawyer is suitable when your mortgage loan application has been rejected.

  • A lawyer can walk you through the contract and highlight anything in the purchase agreement that outlines your rights and obligations. This is an important document that outlines important financial aspects like the deposit. It’s important for a lawyer to look this through because the purchaser can get this deposit back if they cancel the sale for a reason in this agreement.
  • Lawyers are also experts at analyzing the different contingencies included in these sales contracts. Having a legal professional on your side will help you navigate any disputes that arise in the purchase agreement or other documents.

There are some other things that are important to understand legally. There’s a difference between commercial and residential purchase agreements. They are not the same. The commercial variety has a more extended conditional period.

It’s important to remember that alternative financing is a good option if a mortgage application falls through. A second mortgage is a good idea if you already own a property because these alternative lending solutions are often based on equity. Many private lenders require that you have at least 25% equity in an existing property before they consider one of these solutions.

Looking Into Alternative Financing Options?

Mortgage Broker Store focuses on several mortgage-related products. One of our priorities is mortgages that don’t meet traditional lending institution requirements. Our team includes private lenders, brokers, and authorized mortgage agents. Let us help you prepare for and get a product that meets your requirements.

Email or call 416–499–2122.

Jonathan Alphonso

Mortgage Agent, Web Developer, and Real Estate Investor. Together with Ronald Alphonso I run I write about mortgage related topics.