A pre-approval is a lender’s view of your finances before it has seen the property, so a home loan can still be declined after your offer is accepted. For first home buyers, the most common cause is a valuation that comes in below the purchase price, and with house prices falling in all eight capitals in the September quarter, that risk is higher than it was a year ago. A decline at this stage is serious, but it is rarely the end of the purchase if you act quickly and know where the problem sits.
Why a home loan gets declined after pre-approval
Formal approval is the point where the lender checks the property itself, verifies your documents in full and re-runs serviceability at current rates. Any of those steps can produce a different answer from the pre-approval.
The usual causes are a low valuation, a change in your circumstances such as a new job still in probation or a new car loan, a property the lender won’t accept as security, or a rate rise that has reduced your borrowing power since the pre-approval was issued. Lender policy can also tighten between pre-approval and application, particularly for higher-LVR loans.
Step 1: Find out the exact reason for the decline
Ask the lender, or your broker, for the specific reason. “Declined” covers very different problems, and the fix for a valuation shortfall is nothing like the fix for a credit file issue. Ask whether the decline is final or whether the lender would approve with conditions, such as a lower loan amount or added LMI.
A conditional “yes at a lower amount” is a common outcome after a low valuation. It changes the cash you need to bring, while the rest of the application stays intact.
Step 2: Tell your conveyancer about your finance date straight away
If your contract includes a subject-to-finance clause, it will usually have a deadline. Let your conveyancer or solicitor know about the decline the day it happens, so they can advise you on the clause and whether an extension is possible. The finance side can’t be fixed in a day, so giving them time to act matters.
Step 3: Work out the gap if the valuation came in low
Lenders calculate your LVR on the lower of the purchase price or their valuation, so a low valuation creates a cash gap. Say you agreed to pay $700,000 with a $70,000 deposit, planning to borrow $630,000 at 90% LVR. If the valuation comes in at $660,000, the lender’s 90% limit is $594,000, leaving a $36,000 shortfall before costs.
Options to close that gap include adding savings, a gifted deposit from family, or a family guarantee that uses a parent’s property as extra security. Borrowing at a higher LVR with LMI may also work, though it adds cost, and in this example the loan would sit at about 95% of the valuation, which only some lenders accept. Renegotiating the price with the seller is another option, though it depends entirely on their position.
Can you challenge a low valuation?
You can ask the lender to review the valuation, usually by supplying recent comparable sales that support the price. Success is not guaranteed, because valuers work from their own sales evidence and are conservative when prices are falling. A different lender may order its own valuation through a different panel, which can produce a different figure, though there is no guarantee it will be higher.
Step 4: Apply with a lender whose policy fits
One lender’s decline does not mean every lender will say no. Policies differ on probationary employment, casual and contract income, how HECS or HELP debt is assessed, which property types they accept, and the maximum LVR for first home buyers. A file that fails at one bank because the apartment is under 40 square metres, or because the borrower is three weeks into a new role, may suit another lender’s policy.
Be selective about where you apply next. Each application usually adds a credit enquiry to your file, and several in a short period can count against you. A broker can check a lender’s policy before submitting, so the next application goes to a lender likely to accept the scenario. Our first home buyers page outlines how we approach this.
Step 5: Fix the cause before you reapply
If the decline came from serviceability, small changes can matter. Closing an unused credit card helps because many lenders assess about 3% of the full limit each month, regardless of the balance, so a $10,000 limit can count as roughly $300 a month. Paying off a small personal loan or buy now pay later account can also lift borrowing power.
For a decline linked to a credit file issue, get a free copy of your report from Equifax, Experian or illion and check it for errors. Incorrect listings can be corrected, and a default that has been paid may be viewed differently by some lenders.
How to lower the risk of a decline next time
Get pre-approval refreshed if it is more than a few months old or rates have risen since it was issued. Keep your finances unchanged between pre-approval and settlement, with no new credit and no job changes if you can avoid them. Leaving a buffer of savings above your deposit gives you room if a valuation comes in short.
A home loan declined after your offer is accepted is stressful, but most causes have a lending fix. The faster you identify the reason, the more options you keep on the table.
Key Takeaways
- Pre-approval is not a guarantee, and a loan can still be declined once the lender values the property and verifies your documents.
- A low valuation is a common cause, because lenders calculate LVR on the lower of the price or their valuation.
- Tell your conveyancer about a decline straight away if your contract has a finance deadline.
- Lender policies differ, so a decline at one lender does not mean every lender will say no.
- Several applications in a short period add credit enquiries, so check policy fit before applying again.