Why Was My Loan Declined After Pre Approval?

6 Reasons Your Home Loan Pre Approval Might Be Rejected

If you’ve started the home buying journey, saving for a deposit and researching the local property market, you might have also considered getting pre-approval on your home loan. It can give you the confidence to know how much you’re able to borrow and can potentially speed up the process should you find the perfect property.

Getting mortgage pre approval is an exciting first step when you’re buying a home. It usually signals that you have provisionally met the lending criteria that the bank or finance institution is looking for. But many people don’t realise that it is still possible for your loan application to be rejected even after obtaining approval in principle. Getting loan pre approval is not, in fact, a guarantee that your lender will authorise your formal loan application. Why might this happen, what happens when your loan is declined after pre approval and what can you do if this happens when applying for a home loan? Let’s start with the finance terminology.

What Is Conditional Approval?

Conditional approval on your home loan is when a lender has done initial assessments of your finances against their lending criteria and decided how much they might be willing to lend you, subject to certain conditions.

Pre approval vs conditional approval: is there a difference?

Conditional approval and pre approval are essentially the same thing. It’s also sometimes called approval in principle and it can be a helpful first step in the mortgage application process for you to gain some peace of mind and establish your borrowing power and potential property price range.

But it’s important to remember: it’s not a final guarantee. With conditional approval, the lender has assessed your income, expenses and undertaken credit reporting to understand your credit history but they still need to confirm details about the property you want to buy and conduct other final checks.

What Is Unconditional Approval?

Unconditional approval - also known as formal approval or full loan approval - is when the lender has fully assessed both you and the specific property you want to purchase. All conditions have been met and the lender issues a formal letter confirming they’ll fund the loan.

Unconditional approvals confirm the final details including the loan amount, the annual interest rate and your repayment amounts.

However, until you reach unconditional loan approval, your home loan can still fall through.

What Happens After Pre Approval?

Pre approval usually takes a few days but is dependent on the lender and your specific circumstances. After you get your mortgage pre approval, you’ll typically:

• Start house hunting with your budget in mind.

• Make an offer on a property.

• Sign a contract, usually subject to finance and you will apply for unconditional approval.

• Your application will be assessed in detail and the lender will then perform a final assessment - including a valuation of the property.

If everything stacks up, you’ll receive unconditional loan approval. But sometimes, this final stage can hit a snag.

6 Common Reasons a Loan Is Declined After Pre Approval

Here are six reasons a lender might reject your loan application, even after giving you the thumbs up at pre approval stage:

1. Your Financial Situation Changes

The most common reason why a loan might be declined after pre approval is if your financial situation changes significantly. Lenders will reassess your financial position before final approval, to ensure you’re able to service the loan. Changes that might affect this include:

• Change of job: job stability is an important criteria for lenders as you present less of a risk

• Take out more debt

• Have a drop in overall household income

• Make other large purchases

Maintaining the same level of income and expense during the loan application period is crucial to getting final approval.

2. The Property Doesn’t Meet the Lender’s Criteria

Even if you’re financially sound, the property itself must also meet the lender’s standards. Some scenarios which might affect unconditional approval include:

• It’s in a location with high risk (e.g. mining towns, flood zones).

• If the property needs substantial renovation

• The valuation comes back lower than the purchase price

• Some studio apartments and high rise developments might be deemed higher risk

It’s worth checking the criteria that your preferred lender uses before beginning your property search.

3. Your Credit Score Drops

Even minor defaults, late payments or new credit inquiries can negatively impact your credit score in between pre-approval and an unconditional mortgage offer. When you’re in the process of getting a home loan approved, you should make sure you pay all credit card bills on time and avoid applying for new credit products.

4. Errors In Your Application

If you’ve made mistakes in your application or omitted information when applying for pre-approval, your final mortgage application could get declined. It’s vital that you don’t over-inflate your income or underplay your debts. Honesty is definitely the best policy when it comes to loan applications.

5. Interest Rates Have Changed

Interest rates are regularly fluctuating and are one of the biggest factors in people being able to make their repayments. If interest rates have increased between pre approval and your final loan application, the lender may decide to reassess your application.

6. The Lender’s Loan Criteria Has Changed

Sometimes lenders change their lending policies based on economic and market conditions. Unfortunately this might mean that your application status changes between pre approval and your loan being confirmed.

What To Do If Your Mortgage Pre Approval Gets Declined

Having your loan declined after pre approval can be stressful, but it doesn’t mean you’re out of options. Sometimes the reason for the loan being declined is out of your control. However, there are a few important steps you should take to help you understand where the issues are and address them before making another application.

• Ask why it was declined: Get a clear understanding from the lender.

• Don’t rush to reapply: Multiple applications can damage your credit score.

• Check your finances: Review your income, debts, and spending.

• Consider a different property: Sometimes it’s the property, not you.

• Speak to a home loan broker: A broker like CJG Finance can review your situation, suggest lenders more suited to your circumstances, and help you get back on track.

Getting conditional approval is a great start, but remember: it’s not a guarantee. Understanding the difference between pre approval vs conditional approval, and what unconditional approval means, will help you plan ahead and avoid surprises.

If you’d like expert support to apply for pre approval or you’ve had your loan declined after pre approval, don’t go it alone. CJG Finance is here to help you navigate the next steps, compare lenders and strengthen your application. Involving a home finance expert from the get-go is a good idea for added peace of mind.