Receiving home loan pre-approval can be an encouraging step towards buying a property. But what happens if your lender later declines the application, even though you were previously told you could borrow?
A mortgage declined after pre-approval can be stressful, especially if you have already found a property, signed a contract or started arranging settlement.
The important thing to understand is that pre-approval and unconditional approval are not the same. A decline does not necessarily mean every lender will reach the same decision, but it does mean you need to understand what has changed before proceeding.
Can a Bank Decline Your Home Loan After Pre-Approval?
Yes. A home loan can be declined after conditional pre-approval if the application does not satisfy the lender’s requirements during the final assessment.
Pre-approval generally indicates that a lender has assessed some aspects of your financial position, subject to stated conditions. The extent of that assessment varies between lenders.
Unconditional approval usually involves additional verification, including relevant property and borrower requirements.
Even unconditional approval should be read carefully alongside its terms and conditions before you assume every settlement requirement has been satisfied.
Why Would a Home Loan Be Declined After Pre-Approval?
Changes to Income or Employment
A reduction in income, change in employment arrangements or new information about your earnings may affect the lender’s affordability assessment.
Property Valuation Issues
If the lender’s valuation is lower than expected, the proposed loan-to-value ratio may no longer meet its requirements.
Additional Debts
New credit cards, car loans, personal loans or other financial commitments may reduce your borrowing capacity.
Credit History Concerns
New credit enquiries, missed repayments or information identified during verification may affect the credit assessment.
Unverified Financial Information
Documents provided during the final application may differ from the information used during the preliminary assessment.
Property or Security Restrictions
The property itself may not satisfy the lender’s security criteria, even if your personal finances appear suitable.
What Should You Do Immediately After a Mortgage Decline?
1. Ask for the Reason
Request an explanation of the lender’s decision. The reason may relate to borrowing capacity, verification, credit history, the property or another lending condition.
2. Review Your Approval Documents
Check the conditions attached to the original pre-approval. This can help identify which requirements remain outstanding or were not satisfied.
3. Check Your Property Contract
If you have entered into a contract, speak with your conveyancer or solicitor about any finance conditions, relevant deadlines and your legal position.
4. Avoid Multiple Applications Without a Plan
Submitting applications to several lenders in quick succession can result in additional credit enquiries. It is usually more useful to understand the original decline before considering another application.
5. Review Alternative Lending Options
Another lender may apply different income assessment or property criteria. However, a different policy does not guarantee approval.
What if the Property Valuation Is Too Low?
Imagine you agreed to purchase a property for $1 million, but the lender’s valuation comes back at $950,000.
The lender may calculate its loan-to-value ratio using the lower valuation, subject to its policies. That could mean you need a larger contribution or a different loan structure.
Possible options may include reviewing the valuation information, contributing additional funds if available or considering another lender’s assessment.
Not every lender will accept the same security, and a different valuation outcome cannot be guaranteed.
Can You Apply With Another Lender After Being Declined?
Potentially. Different lenders can have different policies for employment, income verification, credit history and property security.
However, applying elsewhere without addressing the reason for the original decline may produce the same result and additional credit enquiries.
A mortgage broker can help review the circumstances and determine whether another application may be appropriate.
What if Your Financial Situation Changed After Pre-Approval?
Pre-approval generally relies on the information available at the time of assessment. If your circumstances change, the lender may need to reassess the application.
Changes worth discussing with your lender or broker include a new job, reduced hours, parental leave, additional debt, new dependants or a change in household expenses.
Being transparent about these changes is important. Do not rely on outdated borrowing estimates when making a significant property commitment.
Has Your Home Loan Been Declined?
Stellar Finance Group can help you review the lending issues behind a declined application and explore whether another suitable mortgage option may be available.
If settlement is approaching, let us know your timeframe when contacting us. Legal deadlines should also be discussed directly with your conveyancer or solicitor.
What Documents Should You Prepare?
Depending on the reason for the decline, it may be helpful to gather:
- Your original pre-approval letter and conditions
- Correspondence explaining the decline
- Current income and employment evidence
- Recent statements for existing debts
- Property contract and relevant valuation information
- Details of your deposit and available funds
- Relevant credit report information
The documents needed will depend on the proposed lender and your circumstances.
Frequently Asked Questions
Does pre-approval guarantee a home loan?
No. Pre-approval is generally conditional and does not guarantee unconditional approval or settlement.
Can a mortgage be declined because of the property?
Yes. Valuation and security requirements may affect the final decision even if the borrower meets other lending criteria.
Can I get another mortgage after being rejected?
Potentially. Another lender may have different criteria, but a fresh assessment and approval are required.
Will a declined home loan damage my credit score?
The outcome depends on the credit information reported. A credit application enquiry may be recorded, but the lender’s internal decline decision is not necessarily recorded as a separate negative event.
What happens if finance is declined before settlement?
Your position depends on your contract and the relevant legal requirements. Contact your conveyancer or solicitor promptly.
Speak With a Sydney Mortgage Broker About Your Next Step
A declined application can have several possible causes. Identifying the actual issue is more useful than immediately submitting another application.
Stellar Finance Group assists Sydney borrowers with home loan options and more complex lending circumstances.
Book a meeting to discuss your application and the options that may be available.
