Getting pre-approved for a home loan is one way to simplify your home loan journey. It gives you an idea of how much you might be able to borrow for a house, making it easier to decide on a budget for narrowing your property search.
You’ll typically come across two types of pre-approvals – a quick, system-generated pre-approval and one based on a thorough assessment of your financial situation. You’ll often see a system-based pre-approval on lender websites, promising you an instant quote regarding how much you could borrow. On the other hand, a full assessment could take up to two business days or more. A lender will thoroughly evaluate your financial position in this case and conduct a credit check before pre-approving your home loan. However, despite a full assessment of your financial position and a credit check, a pre-approval is not a guarantee that your home loan application will be finalised.
What is a home loan pre-approval?
A pre-approval means that a lender has agreed to lend you a specified sum of money towards the purchase of your house, subject to some conditions being met. As a home loan pre-approval is conditional in nature, it doesn’t guarantee you’ll receive the final approval on your mortgage application.
That being said, if the lender pre-approved you after a full assessment, it means they were satisfied with your financial situation at that time and found you creditworthy. However, a lender will carry out another full assessment before granting you final approval.
If your financial position has changed for the worse since you were pre-approved, or the property you choose doesn’t meet the lender’s criteria, it could lead to your mortgage application getting rejected despite being previously pre-approved.
Common reasons why your mortgage application may be declined after pre-approval
1. Your financial situation has changed
Your home loan pre-approval amount is based on an assessment of your income and expenses. Therefore, any adverse change in your financial situation between pre-approval and approval could lead to your home loan application being rejected.
This happens because the lender is legally obliged to only advance you a loan you can comfortably service. When your income reduces, your ability to service a loan is also likely to decline, which is a red flag for any lender.
Even if your income level remains the same, but you take on a large debt, your repayment capacity will still change because your monthly outflow will increase. When a lender finally assesses your finances before mortgage approval, they may find you’re no longer eligible for the loan size they previously approved you for, leading to rejection.
2. The property you’ve chosen doesn’t qualify for a mortgage
Different lenders have different rules around the types of properties you could use to secure a loan. When advancing a loan, lenders want to be sure about the future of their money. Besides your repayment capacity, they also want to ensure the property you’re buying is relatively safe. For instance, a property in a disaster-prone area or a studio apartment is difficult to resell compared to other properties. If you select such a property after pre-approval, it’s possible that it doesn’t meet the lender’s criteria, and your application ends up getting rejected.
3. Your credit score has changed
Any negative change in your credit score will adversely impact your mortgage application. That’s why it’s important to pay your credit card bills on time, avoid taking on new debt after getting pre-approved, and continue making existing repayments on time to maintain a healthy credit score.
4. The lender’s eligibility criteria have changed
A lender may revise their eligibility criteria after you were pre-approved for a home loan. But what if you no longer meet the updated lending criteria? There’s a risk of your mortgage application getting rejected in such cases.
Here’s a simple example. Consider a lender who only advances home loans to borrowers with a minimum credit score of 700. After you were pre-approved, the lender decided to raise the minimum acceptable credit score to 750. However, your credit score was 730 at the time of pre-approval, and even though it hasn’t changed for the worse, it no longer meets the lender’s eligibility criteria.
5. You switched jobs
It’s generally advisable to stick to your employer until your home loan is approved. When you switch jobs, it can give the impression that your employment is unstable, which could impact your repayment capacity according to lenders. However, if you generally have a stable job history and you’re moving to an equal or better post in the same field, lenders may still consider your application if your income level stays the same.
6. You omitted some information while filling out your loan application
When describing your financial position to a potential lender, it’s important to be honest and accurate. If you missed disclosing any information or supplied incorrect information during pre-approval, and the lender finds out about this later, your mortgage application is likely to get declined.
What can you do if your mortgage application is declined?
A mortgage pre-approval makes it somewhat easier to get your final application over the line, but it’s no guarantee. Even if you’re pre-approved, it’s important to keep your finances and credit score in check to avoid disappointment at a later stage.
Understanding the reasons why home loan applications get rejected can also help you avoid some of those mistakes. But what do you do if you did everything right, but your home loan application was declined?
The first thing to do is not to lose heart. A denied mortgage application is not the end of the world. However, instead of applying to other lenders, you should try to find out why your mortgage application was denied. You could ask the lender directly and even speak to a mortgage broker for help. Once you find out why, take time to improve on those areas before applying for a home loan again.
It’s also worth remembering that sometimes the reason for your application getting rejected may be out of your control. For instance, if interest rates rise between your pre-approval and final application, the lender may find you can no longer service the loan at a higher rate, and there’s little you can do about it.
In such cases, it’s worth crunching the numbers to determine your borrowing capacity and re-apply for a home loan accordingly. A mortgage broker can help you assess your home loan serviceability, making it easier to determine the size of the loan you can afford. A broker can also advise you on other aspects of your mortgage application to make it stronger and increase the chances of approval.
