Applying for a home loan can be exciting yet stressful and receiving a pre-approval feels like you’re one step closer to your dream home. However, a pre-approval isn’t a guarantee of final approval, and there are several reasons why a lender might reject your application. Here are five common reasons and what to do if it happens.
1. Changes in Your Financial Situation
Any significant change in your financial situation could impact your home loan application. If you’ve lost your job, seen a reduction in income, or switched jobs since being pre-approved, lenders may view you as a higher risk. They want to ensure you can comfortably repay the loan. To avoid this, aim for financial stability between pre-approval and applying for the loan.
2. Deterioration in Your Credit Score
Your credit score plays a crucial role in a lender’s decision. If you’ve taken on new debt or missed payments on existing loans, your credit score may drop, which could lead to a rejection. Managing your existing debts carefully and avoiding additional credit applications after pre-approval will help protect your score.
3. Changes in Lending Criteria
Sometimes lenders change their lending criteria after issuing pre-approval. Tightened requirements might make you ineligible for a loan. Additionally, pre-approval errors—such as incomplete or incorrectly verified information—could also cause problems later. Ensure all your documents are accurate and up-to-date to minimise the risk.
4. Lender Concerns About the Property
The property itself can be a reason for rejection. Lenders may have reservations about properties that are difficult to sell or present high risk, such as those in disaster-prone areas, needing major renovations, or in certain high-density urban zones. Check with your lender ahead of time if there are specific types of properties, they avoid financing.
5. Rising Interest Rates
An increase in interest rates between pre-approval and final application may also result in rejection. If rates rise, your ability to service the loan may decrease, leading the lender to deny your application. To mitigate this risk, consider rate-locking in a fixed interest rate during the pre-approval process. Alternatively, some lenders may also honour the rate at the time of pre-approval, so this may be worth considering.
What to Do if Your Home Loan Application Is Rejected
If your application is rejected, don’t panic. There are steps you can take:
- Work on improving your credit score.
- Shop around for a different lender (but avoid applying to multiple lenders quickly, as it can hurt your credit score).
- Stay longer in your current job to show financial stability or meet lender policy.
- Create a budget and demonstrate stronger savings habits.
- Consider choosing a different property.
A mortgage broker can assist you in navigating these challenges. They understand both your financial situation and the lender’s requirements and can guide you toward a successful application.
If you want someone to help you navigate the pre-approval process and work on a successful home loan application, please book a no-obligation call.
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