Feeling confident your final home loan application will be successful after pre-approval is something a lot of us experience. After all, the definition of 'approval' means to officially accept or allow something.
But it's not that simple when it comes to home loan pre-approval. A pre-approval is just a preliminary step in the mortgage application process, not a guarantee that your home loan will be successful.
In this article, we're going to take you through some of the common reasons home loan applications are denied even after pre-approval, and what you can do to stop this from happening in the future.
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What is home loan pre-approval?
Home loan pre-approval is a lender's conditional agreement to provide you with a loan, based on an initial assessment of your financial position. It basically establishes your financial position with the lender, and gives you some peace of mind in knowing your borrowing capacity so you know what type of house you can afford.
However, it's not a final approval, and if there are changes to your financial situation or the lender's criteria, you could still face rejection when it comes time to apply for a home loan.
See Also: How does home loan pre-approval work?
Why was my home loan rejected after pre-approval?
Lenders reassess applications before granting final approval, and any changes in your financial circumstances or the lender's policies could result in rejection, even if you received pre-approval.
"It is important to remember that pre-approval is highly conditional and is based on certain conditions and if any of these conditions change, it can affect the final approval decision," Angus Gilfillan, CEO and co-founder of digital-first mortgage broker Finspo told Savings.com.au.
Here are some of the most common reasons for rejection after pre-approval:
1. Your financial circumstances changed
If your personal or financial circumstances have changed since you were pre-approved, your application may be denied. This could mean anything from having your work hours reduced or losing your job.
If you're earning less income, a lender may think your capacity to make loan repayments has diminished which can make them nervous.
Remember, lenders have a responsibility to ensure borrowers can repay their home loan comfortably. This is why it's important to maintain your income and expenditure as much as you can by maintaining stable employment, avoiding taking on any new debts during the home loan process, and reducing discretionary spending.
2. Your credit score has taken a dive
If your credit score falls below a certain number, a lender may decline your home loan application.
"If something has happened on your credit history, such as a default on your phone bill or another loan, your credit score will be downgraded," Mr Gilfillan said.
Missing credit card payments or taking on new debt can also negatively impact your credit score and thus derail your chances of successful home loan approval.
You can prevent this by paying all your credit card payments on time, avoid applying for multiple credit products such as personal loans and credit cards, and checking your credit score before applying for a home loan through a reporting agency like Experian, illion or Equifax.
Related: Tips to improve your credit score
3. You changed jobs
Switching jobs while you're in the midst of pre-approval and applying for a home loan probably isn't a wise decision.
A lender bases their loan approval decision on the information you initially provided them with. So, if you change jobs during this time, your employment status is categorised as unstable, which in the lender's eyes, deems you as a risky borrower.
4. The lender's credit policies/criteria has changed
It may seem unfair, but lenders can change their lending criteria at their discretion. If a lender makes policy changes, such as stricter lending conditions, that you no longer meet, they could reject your home loan application.
5. Interest rates have increased
Your ability to make home loan repayments can be affected by interest rate rises.
If rates have increased in the time between your pre-approval and home loan application, a lender may reassess your application to determine whether you'll be able to service the loan with a higher interest rate.
To prevent this from happening, you may be able to lock in a fixed interest rate for a specific period of time before the entire home loan application is finalised.
6. The property doesn't qualify for a home loan
Some lenders are hesitant to approve home loans for properties in disaster-prone areas, studio apartments, some high-rise developments, properties in high-risk suburbs (due to price volatility), and properties that may be difficult to resell in the future.
Ask your lender what types of properties fall under this category before you begin searching for your home so to avoid rejection later down the line.
7. You omitted information from the lender
If a lender finds out you omitted information or lied to them when applying for pre-approval, your home loan application can be denied. As with anything, you want to be truthful with the information provided.
Of course, there are other reasons an applicant may have their home loan denied after pre-approval, however the seven reasons listed above are the most common that should be avoided where possible.
What to do if your home loan has been denied after pre-approval
Your home loan got knocked back after pre-approval, now what? Don't stress, here's what to do next.
The first thing to remember is to avoid applying for pre-approval with multiple lenders too quickly.
"It can be a good idea to avoid trying to get pre-approval from too many lenders in a short period of time, as this in itself can impact your credit rating," Mr Gilfillan said.
"It's also important borrowers know why they did not get final approval from a lender and that they address the key issues before next seeking pre-approval."
For instance, if you were denied because of your spending habits or credit history, it may be best to wait three to six months to get your finances back on track before you apply again.
Here are some steps to take if your home loan is denied after pre-approval:
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Find out why the loan was rejected - ask your lender for details
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Fix the issue (work on improving your credit score, submit more documentation if required, stabilise your employment)
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Avoid applying for multiple loans immediately, as this will further hurt your credit score
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Find a property that the lender is willing to accept i.e. meet the criteria
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Consider another lender that is more suited to your circumstances
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Any other suggestions your lender may recommend to you
If you're still unsure what to do and are in need of a little help, try speaking to a mortgage broker. They'll be able to point out what to change when you next apply for pre-approval and can make sure the process runs smoothly.
How can I avoid rejection after home loan pre-approval?
For those of you that are starting the home loan journey for the first time, there are some easy things you can do to increase your chances of approval.
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Make sure all the details in your application are accurate - don't lie or omit important information.
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Pay off any debt, reduce credit card usage, and avoid taking on new liabilities during the pre-approval and application stage. This will improve your debt to income ratio and also boost your credit score.
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Save wherever you can. A savings account partnered with a large down payment will increase your chance of being approved for a home loan even after the pre-approval stage.
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Ask your lender about what types of properties they will and won't accept under their lending criteria.
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Don't change jobs - most lenders require an applicant to be in their job for a minimum of six months and usually have completed their probationary period.
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Talk to a mortgage broker as they can help you find a lender where you have a better chance of getting approved for a home loan.
According to Mr Gilfillan, these are the three key steps a borrower should undertake to prevent themselves from being denied for their home loan after pre-approval.
1. Understand the conditions of your pre-approval
"It's important to know on what basis you have been pre-approved, so you know the impact of any decisions you make regarding either your finances or the property you are looking to purchase."
2. Maintain a financial buffer
"Ideally, you want to have a buffer in your finances so that small changes to your income or expenses won't impact the final credit approval."
3. Communicate with your mortgage broker
"If you have a broker, it's always a good move to let them know if you expect a change in your circumstances as soon as you can, that way they can assess the situation and let you know if the changes are likely to impact your home loan approval."
2025 HECS/HELP debt policy changes
Recent changes to home loan lending rules could work in your favour if you have a university debt.
Previously, lenders factored in HECS repayments when calculating borrowing power, potentially reducing loan amounts. However, in response to growing concerns about housing affordability, Australia's major banks are now reviewing their approach after Federal Treasurer Jim Chalmers instructed both the banking regulator APRA and the non-bank lending watchdog ASIC to ease restrictions.
What's changing?
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HELP debt will be removed from debt-to-income (DTI) calculations. Lenders will no longer need to count HELP repayments as "debt" when reporting borrowers' debt-to-income ratios.
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HELP debt exceptions in serviceability assessments. Lenders will now have more flexibility to exclude HELP repayments when assessing serviceability, especially if the borrower is expected to fully repay their HELP debt within 12 months through compulsory income-based deductions.
What does this mean for home loan applicants?
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Borrowers with HELP debt may have a higher borrowing capacity. Since HELP debt will no longer be included in DTI calculations, lenders may approve larger home loan amounts for those with student debt.
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If your HELP debt is nearly paid off, it might not count against you. If a borrower is expected to fully repay their HELP debt within 12 months, lenders may exclude their HELP repayments from serviceability assessments.
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Lender policies will still vary. While APRA has provided new guidance, banks and lenders will decide how to implement these changes based on their own risk appetite and lending criteria.
Prospective borrowers should check in with their lender to understand how these changes could impact their borrowing power and home loan eligibility.
Savings.com.au's two cents
Applying for a home loan can be stressful enough without the added factor of being denied after receiving pre-approval.
You have to remember that pre-approval doesn't guarantee you will get the loan. The only time you can be 100% certain that the loan is yours is when you close the deal - a lot can happen to derail your chances during the pre-approval and final stage.
One of the top things you can do to ensure you're successful is maintain the status quo throughout the entire loan process. Don't be late on your credit card payments, don't change jobs, and don't spend money on unnecessary things. In other words, keep all your finances the same.
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