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Can a loan be denied after pre-approval?

Alex Ritchie avatar
Alex Ritchie
- 4 min read
Can a loan be denied after pre-approval?

Being approved for home loan pre-approval is an exciting part of the home loan journey. However, many home buyers are unaware that your application can still be denied even after gaining pre-approval. Not only that, but pre-approval can expire.

Let’s explore some of the reasons why your home loan application may be rejected even after gaining pre-approval.

Why your home loan was rejected after pre-approval

Pre-approval for a home loan is a handy way to know how much you may be approved to borrow, and therefore how much you can spend at the auction this weekend. Home loan pre-approval typically lasts three to six months. 

This is for your benefit as well as the lender’s, as your circumstances or the home loan environment may change over that period, and you could be approved to borrow more or less, depending on market conditions.

Having pre-approval may be helpful to allow home buyers to make offers on properties as soon as possible, without missing out while waiting for full approval. However, pre-approval does not guarantee you will be given full approval for a mortgage.

You will still need to apply for full loan approval, even after you make an offer on a home. Some of the most common reasons that home buyers may be rejected for the mortgage after pre-approval are as follows: 

Your financial circumstances change

Unfortunately, your financial situation may change over the three to six months that you have mortgage pre-approval. This includes anything from income-related reasons, like a job loss or a reduction in working hours, to a change in the credit history of one or multiple applicants.

Put simply, if an applicant’s income drops, they may not be able to service the original pre-approved loan amount. This may disqualify them from full approval for the standard home loan. 

Issues with your documents

When you apply for pre-approval for a mortgage, the lender will not as thoroughly assess your documents as they would with your traditional application. In fact, pre-approval is typically determined by pre-set criteria that looks at factors like your income and expenses, and uses internal methodology to quickly approve or deny pre-approval applicants. 

When you apply for a home loan, you’ll provide the lender with a range of personal documentation and information to help them assess your ability to safely repay the mortgage. The lender will go through these documents with a fine-tooth comb in more detail than with your pre-approval application. This includes information like:

  • Your passport or driver's license
  • Proof of income from a PAYG statement or tax return
  • Details of existing assets
  • Details of existing liabilities
  • Three months’ worth of bank statements
  • Your credit history and credit score

If the lender is unable to verify your application documents, you may be rejected for your home loan. 

Your property does not meet lender requirements

Another unfortunate circumstance that could result in the denial of your home loan application is when the property you make an offer on does not meet the lender’s requirements. This may include not meeting the loan-to-value ratio (LVR) requirements, or acceptable dwelling criteria.

The LVR requirements of a mortgage are in place to prevent you from taking out a home loan that you cannot comfortably repay. For example, if your lender will approve loans with LVRs up to 90%, your home deposit must be 10% of the property’s value, or more. Put simply, if you do not have a big enough deposit, you may not be approved for a mortgage for the property you’re after. 

Further, not every block of land or dwelling you find will be approved by your lender to purchase with a home loan through them. This may include:

  • Studios or apartments below a square-footage minimum
  • Dwellings which do not pass building inspection
  • Dwellings on land with geological issues, such as flood-prone homes or coastal property at risk of erosion

Before you apply for your full home loan, it’s worthwhile going through your finances again to ensure that everything is in order. Grabbing a copy of your credit report, or looking at your credit scores can be a helpful way to gauge your financial health as well. 

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Product database updated 21 Jul, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.