Receiving pre-approval for a home loan is an exciting step in the journey to purchasing a property. It gives you confidence in your budget, shows sellers you’re a serious buyer, and helps streamline the purchasing process. However, pre-approval is not a guarantee of final approval, and some borrowers find themselves unexpectedly rejected when it comes time to secure the loan.
Understanding why this happens can help you avoid pitfalls and keep your property purchase on track. Below are some common reasons why home loans are rejected after pre-approval and how to mitigate these risks.
1. Changes in Your Financial Circumstances
Lenders base their pre-approval decisions on the financial information you provide at the time of application. If your financial situation changes before final approval, it could impact your ability to secure the loan.
Examples of financial changes:
Loss of employment or a reduction in income.
Taking on additional debt, such as a car loan or credit card.
Spending part of your deposit on other expenses.
How to avoid this:
Avoid making significant financial changes, like switching jobs or applying for new loans, until after your mortgage is finalised.
Keep your deposit intact and maintain a stable financial position.
2. Property Valuation Issues
Lenders conduct property valuations as part of the loan approval process to ensure the property is worth the amount you’re borrowing. If the property is valued lower than expected, it can cause issues with your loan.
Why this matters:
If the valuation is lower than the purchase price, you may need to cover the shortfall with your own funds.
Lenders may reduce the amount they’re willing to lend or reject the loan altogether.
How to avoid this:
Work with your mortgage broker to understand the property’s likely valuation before making an offer.
Include a clause in your contract of sale that makes the purchase conditional on financing approval.
3. Changes in Lending Policies
Lenders can update their lending policies or criteria at any time, and this may affect your ability to secure final approval. For example, if a lender tightens their requirements for debt-to-income ratios or loan-to-value ratios, you may no longer meet their criteria.
How to avoid this:
Keep in touch with your mortgage broker, who can monitor changes in lending policies and recommend alternative lenders if needed.
Act quickly once you’ve received pre-approval to minimise the risk of policy changes affecting your application.
4. Errors in Your Documentation
Inaccurate or incomplete documentation can cause delays or lead to outright rejection of your loan application. During pre-approval, lenders conduct an initial assessment, but they will thoroughly review your documents during final approval.
Common documentation issues:
Mismatched or outdated financial records.
Inconsistent information provided in your application.
Missing required documents, such as proof of income or identification.
How to avoid this:
Double-check all documents before submitting them to the lender.
Ensure your financial records are up-to-date, including recent payslips and bank statements.
Work with a mortgage broker to ensure your application is complete and accurate.
5. Changes in Credit Score
Your credit score plays a significant role in the lender’s decision-making process. Even after pre-approval, lenders will check your credit score again before granting final approval. If your score drops, it could jeopardise your application.
Causes of credit score drops:
Missing payments on existing debts.
Taking out new credit accounts or increasing existing credit limits.
Defaulting on utility or phone bills.
How to avoid this:
Maintain good credit habits, such as paying bills on time and keeping credit card balances low.
Avoid applying for additional credit or making significant financial commitments until after your loan is finalised.
6. Unacceptable Property Types
Not all properties qualify for standard home loans. If the property you’re purchasing is considered high-risk or unusual, the lender may reject your loan application.
Examples of unacceptable properties:
Rural or remote properties.
Apartments in high-density developments.
Properties with structural issues or unapproved renovations.
How to avoid this:
Consult your mortgage broker before committing to a property to ensure it meets lender requirements.
Consider obtaining a building and pest inspection to avoid surprises.
7. Overextending Your Budget
Lenders assess your borrowing capacity based on your current financial situation. If you stretch your budget too far or take on a property that exceeds your pre-approved loan amount, your application could be rejected.
How to avoid this:
Stick to properties within your pre-approved budget.
Factor in additional costs like stamp duty, legal fees, and ongoing maintenance.
The Importance of Working with a Mortgage Broker
Navigating the complexities of home loan approval can be challenging, especially when unexpected issues arise. A mortgage broker like Steve Keramidas can be your advocate, guiding you through the process and helping you address potential hurdles before they become problems.
At Mortgage Compare Plus, we specialise in finding the right loan for your unique situation. Our team stays updated on lending policies, assists with documentation, and helps you choose a lender that aligns with your goals.
Conclusion
While pre-approval is an essential step in the home-buying process, it’s not a guarantee of final approval. By understanding the potential pitfalls and working proactively to address them, you can reduce the risk of rejection and move closer to securing your dream home.
If you’re ready to take the next step or want personalised advice, contact us at Mortgage Compare Plus. We’re here to make your home loan journey as smooth and stress-free as possible.
Disclaimer: This article provides general information only and may not reflect the publisher’s opinion. None of the authors, the publisher or their employees are liable for any inaccuracies, errors or omissions in the publication or any change to information in the publication. This publication or any part of it may be reproduced only with the publisher’s prior permission. It was prepared without taking into account your objectives, financial situation or needs. Please consult your financial adviser, broker or accountant before acting on information in this publication.