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Getting a pre-approval for your home loan is great, but it’s not enough to ensure that you’ll get a mortgage. You still have work to do! There are many mistakes applicants make when going through the process of getting their first loan, which can result in getting rejected even if they have a pre-approval letter from their lender.
In addition to giving you a clear idea of your purchasing capacity, if you meet the conditions of your pre-approval, you could save a lot of time on the final approval of your mortgage. However, there are certain situations where your loan application might be declined even with a pre-approval. Here’s why:
1. Job security
Job stability is a critical factor for a lot of mortgage lenders. Constantly changing employment, or changing jobs during the period you apply for a loan might be detrimental to your mortgage application, as it could indicate that you’re not yet established at your new workplace.
Many companies have a mandatory probation period for new employees, during which an employer retains the right to terminate employment without notice.
Clearly losing your job will mean a bank will query your ability to make loan repayments, meaning your application could be rejected.
2. Fluctuating finances
Lenders scrutinise borrowers harshly if emergency expenses or unnecessary spending appears in an applicant’s financial history. Sudden expenses like illness or responsibility of another dependant like a parent or child can impact on your overall net-worth.
Lenders are looking for a long-term ability to repay your loan, and sudden changes to your financial situation, particularly spending beyond your means for long periods, will make a lender likely to shy away from granting you final approval.
3. Declining income
Many home loan applicants have additional sources of income away from their main salary, such as a side hustle, or investment dividends. If you experience a decline in revenue from sources outside of your regular income, like rent, or a side hustle, you may find your application rejected. It is possible to ask a lender not to consider these additional income sources when applying for pre-approval, if you anticipate a decline in income from these sources, but this can limit your borrowing power.
4. Negative credit score
It always pays to be organised. A dip in your credit score could lead to rejection. Common issues to avoid are:
- A history of missed payments on bills (like utilities or phone bills)
- A surge in spending habits (like online spending)
- Excessively applying for additional credit
5. Over spending on a property when compared to its valuation
Typically a borrower will make an offer on a property after they’ve received pre-approval. It will likely be a condition of the pre-approval that the property meets a satisfactory valuation level. Remember, pre-approval does not include an analysis by the lender of the acceptability of the property.
A mortgage application will likely be rejected if the property you’re looking to purchase fails the criteria for a specific lender or the lender has concerns like structural defects, pest issues or a lack of council approvals.
6. Letting your pre-approval expire
A pre-approval commonly expires after 90 days. If you can’t make your property purchase within this time frame, you will have to start the pre-approval process again.
7. ‘On-the-spot’ approval
Many lenders provide an ‘on-the-spot’ or system-generated pre-approval in a few minutes. Unfortunately this type of pre-approval lacks a thorough assessment of your financial position and therefore should not be relied on heavily by a potential borrower. Relatively speaking, the possibility of your loan application being rejected will likely be higher with a system-generated approval as opposed to a regular pre-approval through the lender’s credit team.
To make the most of your pre-approval and avoid common borrower mistakes, engage a mortgage broker. Not only will a mortgage broker handle all your paperwork but will also guide on which pre-approvals are reliable and are likely to result in a final go-ahead of your home loan application.
If you want to avoid these mistakes and make the most out of your pre-approval application, speak with one of our home loan experts today.