You may assume that once you gain pre-approval for a home loan, full approval is a sure thing – but this is a common misconception. It can be a tough outcome to hear but it is possible for a would-be buyers’ home loan to be rejected even after they gain pre-approval.
However, this doesn’t have to be the end of your home buying journey. There are several reasons that your loan may have been rejected, which means there’s a multitude of opportunities to boost your next application and help improve your chances of approval.
Let’s explore some of the most common reasons a home loan can be rejected after pre-approval, and the practical steps every first home buyer or current home owner thinking about refinancing can take to get their application over the line.
What you need to know about mortgage pre-approval
Full approval is where a home loan lender has assessed your financial circumstance and determined you meet its eligibility criteria and can comfortably service a home loan, without risk that you could likely default on the loan.
Pre-approval, also known as conditional approval or approval in principal, is where a lender provides you with an estimate of what they may lend to you to purchase a property. The lender will still assess your financial situation and provide you with an initial indication that you could service the home loan.
To gain full approval, the lender will fully assess your personal documentation, including your bank statements, payslips, and credit history. This may take several business days to be officially processed, unlike pre-approvals which are typically system generated and may be near instantaneous.
This is not a bad thing, as pre-approval assessments use estimation tools to look at factors like your income, number of borrowers on the loan and the loan amount, to roughly determine how much an average borrower at your financial level could afford to borrow.
And pre-approval offers home buyers an estimate of the funds they should have available to spend on property, so they can begin the home buying journey and start attending inspections and auctions.
7 reasons why your home loan pre-approval can be rejected
Now we understand that pre-approval does not guarantee full home loan approval, it’s worth knowing the most common reasons pre-approval rejection can occur. Keep in mind that these things do happen, and there are steps you may take to rectify a home loan rejection after the fact.
1. Your financial position has changed
Pre-approval for a home loan generally lasts for 30-90 days, and in that time a lot can happen. If your financial situation changes during your pre-approval period and you do not notify the lender of these changes – particularly if they may impact your ability to service the loan – it’s likely that the lender could reject your application.
Changes to your financial situation may include one or more applicants on the loan seeing a reduction in hours at work or losing a job. Providers need to ensure you can comfortably service the loan, and a change to your income could mean you no longer can meet your mortgage repayments.
2. Employment status
Switching your job to a new employer may impact your chances of approval as well if you do not notify the lender of this change – even if your income increases. A lender looks for stability in your finances and being employed for at least 3-6 months (or leaving a probation period) in one role is looked upon more favourably by lenders.
So, if you’re considering making a change at work, it may be worth sticking it out in your new job for several months before you apply for home loan pre-approval.
3. Interest rates have changed
Home loan interest rates are subject to fluctuation over a 20-30-year home loan, so a lender will need to assess your ability to service a loan at a higher interest rate than the one a lender may advertise, also known as a buffer rate. This is for your benefit, as you should expect your home loan rate to rise at some point over several decades, and the lender must determine you can afford higher loan repayments for your protection.
If, during your pre-approval process, home loan interest rates rise due to the Reserve Bank of Australia hiking the cash rate, you may find that your lender has increased this buffer rate it assesses applications with, and you may not qualify for the loan.
4. Your credit score has changed
Your credit report is a crucial factor in determining your eligibility for a home loan. If something were to change that negatively impacts your credit score, such as late payments on your credit card or defaulting on a car loan, this could reduce your credit score and cause a home loan rejection.
5. Types of properties
Just because you gain pre-approval for a home loan doesn’t mean that the lender will approve your chosen property for financing. A lender may choose to reject your application if you want to use the home loan for a property that does not meet its criteria, such as a property in a high-risk disaster area or one requiring major repairs and renovation. Instead, consider a new home build or an existing dwelling that meets the lenders’ criteria.
6. Lending criteria
A home loan lender can change its lending criteria at any time during the application process, including tightening conditions that now exclude you from qualifying for full approval. For example, where it once approved home loans for borrowers with a deposit of only 5% (95% loan-to value ratio, or LVR), the lender may increase this to a 10% minimum (90% LVR) on a home loan.
7. Liar loans
If any of the information you’ve submitted with your mortgage application is proven to be falsified, also known colloquially as a ‘liar loan’, the lender can reject your application for full approval. The lender will go through your personal documentation and financials with a fine-tooth comb, so it’s not worth risking it.
How to prevent home loan rejection
Now you know how common it can be to see a home loan application rejected even after you gain pre-approval, it’s worth exploring ways you can increase your chances of home loan approval, including:
- Avoid multiple pre-approval applications – whenever you apply for a financial product like home loan pre-approval, the lender will perform a hard credit check on you. Multiple credit enquiries at one time can cause home loan rejection as it appears to be financially irresponsible to most Australian lenders. Try to limit your applications for pre-approval to one at a time.
- Boost your credit score – in terms of hard credit enquiries, if you know you have negative events in your credit history or you have a bad credit score, it may be worth working on boosting your credit score before you apply for pre- or full-approval, such as showcasing genuine savings and meeting your repayments on time. And avoid causing negative events during your pre-approval period, such as defaulting on any credit products, like a personal loan or a credit card.
- Long-term employment – as changing jobs during pre-approval can lead to home loan rejection, it’s important to know that lenders look for stability in your finances. Being employed in one role for 12 months or more will generally boost your chances of home loan approval. If you’re self-employed, however, it may be worth considering a low-doc or alt-doc loan instead.
- Taking on new debt – speaking of keeping your financial situation the same, it may be worth avoiding taking on new liabilities, such as opening a credit card or taking out a personal loan, during the pre-approval period.
- Don’t lie – it’s ideal that you do not lie in your application just to get a home loan, as not only may you be rejected for the loan when you get caught, you don’t want to take on a debt you cannot reasonably service.
- Guarantor loans – if you’re struggling to gain home loan approval, it may be worth considering if bringing on a guarantor for the loan as support may boost your chances of approval.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.