Although it's rare, your loan could be declined after receiving unconditional approval. This can be a stressful event in your home loan journey. After all, you've already been through the process of finding a home, making an offer, and being approved for finance.
In this article, we look at the probable causes of your loan being declined after unconditional approval and how to respond.
Unconditional Approval Meaning
Once you find your dream home and your offer gets accepted, the next stage is to get full approval and finalise your loan details with your lender. This stage is commonly referred to as unconditional approval.
When you receive unconditional home loan approval, it implies that your lender thoroughly assessed your loan paperwork and your signed home loan application. Since all the conditions are fulfilled, your lender has decided to provide a home loan based on a specific property you have chosen to purchase.
Your lender will send you a formal home loan approval in writing, stating that the loan approval is unconditional. Our guide to unconditional approval for home loans can help you understand this process better.
Can a Loan be Denied After Unconditional Approval?
Yes, a loan can be declined after unconditional approval, but this scenario is rare.
After unconditional home loan approval, you'll receive the loan documents, which you will need to review, sign and return to your lender once all the details are in order. Once the pre-settlement inspection and home insurance are complete, property settlement culminates with transferring ownership from the seller to the buyer.
Nonetheless, the formal approval letter from your lender stating unconditional approval will likely include 'subject to further bank requirements.'
That being said, there are certain unique financial circumstances where a loan can be declined after submitting the loan paperwork and receiving unconditional approval.
Reasons Why Your Home Loan Was Declined
1. Change in Employment
One of the most typical reasons for a loan to be declined is a change in employment. Job security is one of the key factors that lenders use to assess your ability to repay a loan. Therefore, if you have changed jobs since first applying for finance, you must inform your mortgage broker or lender as soon as possible.
They'll then assess whether the new role meets their lending criteria. For example, if your new position is less secure, has lower income potential, or is in a different industry, it may result in your loan getting declined.
2. Assessment Rate Changes
When you apply for a home loan, your lender will typically assess your financial situation at a slightly higher rate, known as the assessment rate. By using a higher rate than the actual rate, lenders can have greater certainty of your capacity to make monthly repayments on home loans without financial stress. It also helps bankers to minimise the risk against sudden interest rate spikes in the future.
Interest rates can change between the time of unconditional approval and settlement. In most cases, these changes are marginal, and your loan will still be approved. However, if the interest rate rises significantly, your lender may have increased the buffer rate with which it assesses a home loan application.
In the revised scenario, your borrowing capacity may decrease, and you may no longer be able to afford the mortgage repayments. This may result in your loan being declined even after receiving a formal letter stating unconditional approval.
Our online borrowing power calculator can help you estimate how much you may be allowed to borrow based on your current employment situation.
3. Change in Credit Score
Most banks run checks on your credit score to understand your credit history. You may have applied for finance with a positive credit history. However, after formal approval of your mortgage application, you may have incurred multiple new debts or made late payments on your phone bill. In that case, your score will drop, thereby affecting your credit file.
Depending on how much your credit score has changed, it may significantly impact your financial situation. Your recent bad credit history will present you as a risky borrower before your lender. This, in turn, may cause your home loan to be declined even after formal approval for a home loan.
4. Change of Pre-Approval Terms
Pre-approval, sometimes referred to as conditional approval, is received subject to certain conditions being met in future. This could include, for example, a satisfactory property valuation, paying off a car loan or even closure of a credit card.
Your unconditional approval is based on the terms and conditions in place when you first received your home loan pre-approval. However, after giving unconditional approval, the lender may have since updated their lending criteria or policies. Further, the economic climate may have changed since you submitted your home loan application.
For example, you may have applied for finance and received conditional approval when interest rates were low, but they've since increased. The decrease in your purchasing power and the increase in monthly repayments may have resulted in the lender declining your loan application after getting final approval.
5. Issues Identified with Property
Occasionally, an issue may arise with the property after you receive unconditional approval. For example, the property could be located in a flood-prone area, be structurally unsound or have an illegal extension. These issues could make the property ineligible for finance, resulting in your loan being declined at the last minute.
6. Need to Purchase Lenders Mortage Insurance (LMI)
One of the possible reasons you may have lost your home loan approval was the need to purchase LMI. If your home loan requires LMI, you’ll need approval from your lender and your insurer covering your LMI.
7. Pre Settlement Inspection and Checks
After receiving unconditional home loan approval, a few requirements should be met during the settlement period. This includes signing the contract with the correct settlement date, organising stamp duty, lenders mortgage insurance (LMI), and other charges and fees for the completion of the sale.
In addition, most lenders will want to see building insurance and a final property inspection duly completed. If any of these requirements are not satisfied, your loan may be declined at the final stage after receiving approval.
8. Change in Spending Habits
A good savings history is one of the critical things lenders look for when assessing a home loan application. However, after having their loan approved, some home buyers make large purchases that can impact their ability to repay the loan. These include buying a new car, going on an expensive holiday, or taking out a personal loan.
In simple words, if you've made any large withdrawals from your savings account since receiving approval or your genuine savings have decreased, this could be enough to cause your home loan application to be declined.
9. Exceeding Timeframes
The unconditional, formal approval is usually valid for a fixed timeframe. This varies from lender to lender. However, it usually lasts about 3-6 months from the approval date. If you do not settle within this period, your lender may decline your home loan application, and you will need to reapply for finance.
It’s advisable to ask your lender about the timeframes. This will help you complete the process within the allocated time.
What Should You Do If Unconditional Home Loan Was Declined?
While it is a frustrating setback, it's also important to remember that a declined loan after unconditional approval is not the end of the world. The best solution is to start finding the reason for the decline and then work on resolving the issue.
Here are some common problem areas that you can work on for a successful second-round mortgage application:
Improve Employment Circumstances
Lenders want to see that you're in a stable job and can repay the home loan. Aim to show that you've been in your present job for more than six months and your financial position is stable.
If you're self-employed, the biggest reason for a declined home loan is usually inconsistency in your work history or income. Your chances of getting full approval increase considerably if you show at least two years of consistent work and income.
Whether employed or self-employed, ensure that you have all the required documentation, such as tax returns, group certificates and payslips, ready to go.
Clean-Up Credit Report
Since a credit check is a standard requirement for all loan applications, it is essential to have a clean credit file. Therefore, before beginning the mortgage application process, check your report for any errors and get them rectified as soon as possible to improve your credit file. Also, make sure you keep up with repayments on any outstanding debts.
Save for a Bigger Deposit
The last-minute decline after formal approval may likely be due to a low deposit. In such a case, you could work towards increasing your home loan approval chances by saving for a more significant down payment.
Your other options include going with a lender who will require a smaller deposit. For example, some lenders provide up to 95% Loan to Value Ratio (LVR) home loans. Alternatively, if a family member steps in as a guarantor, you may be able to access guarantor home loans up to 110% LVR.
Likewise, consider asking your real estate agent to help you look for a more affordable property aligned with your financial position. This will reduce the deposit amount needed.
Look for the Right Property
Invest some time researching different postcodes to see if there are any restrictions. Likewise, off-the-plan properties may not be a safe bet if you're a first-home buyer. You could end up being declined by your lender if the development doesn't get completed, or if the property's value falls.
Furthermore, sourcing a reliable property and suburb report will ensure that you don't purchase in a risky area or that you’re not overpaying.
Find the Right Lender
Not all lenders are created equal. Some will work with you to try and get your loan approved, while others may not be so helpful. Your first step to applying with the right lender should be identifying why your home loan application was rejected after formal approval. The answer will give you a good idea about which type of lender you need to look for.
For example, some lenders may have lower limits for investment property home loans. Your application may have been declined because you were purchasing an investment property, and the total amount you required was over the limit. In this scenario, you would need to look for a lender that offers higher loan limits suitable for investment properties.
When Can You Apply for Another Home Loan?
Ideally, the best time to apply depends on the reasons cited by your lender for declining your loan application after full approval.
For example, if your loan was declined because of an error in your loan documents, you can reapply as soon as the issue is resolved. On the other hand, if your loan was declined because of a lack of genuine savings, you may need to put aside more money before reapplying.
However, there are some key points to keep in mind when your loan gets declined:
- Mindful Reapplication: Firstly, do not embark on a reapplication spree, targeting more and more lenders for a home loan. Remember that every application you lodge is recorded on your credit file. Furthermore, applying to many lenders conveys that your financial situation may be unstable.
- Be Honest: Never provide false information on your home loan application. It will make matters worse. Lenders thoroughly assess applications for home loans to verify that the information is authentic.
- Seek Expert Advice: Consult a mortgage broker who'll be able to guide you on how to apply for a home loan with reputed lenders. Some lenders who do not fall under the purview of regulatory bodies charge exorbitant interest rates and are unreliable.
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Note: The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.