The transition from renter to homeowner didn't come easy for Moxin Reza and his family when his unconditionally approved loan was denied.
"ANZ approved my home loan via a broker. However, four weeks before the settlement, the bank decided to cancel the loan," Mr Reza shared with InfoChoice.
Although this wasn't his first time buying a property, it was his first time buying a place to live in.
"The bank unconditionally approved it, so I let the 'subject to finance' go as I was then waiting for settlement."
'Subject to finance' is a clause in the contract that protects the buyer in case they are unable to secure financing within the agreed timeframe. This would have allowed Mr Reza to withdraw from the contract without penalty and get his deposit back.
Mr Reza could have felt confident not putting a 'subject to finance' clause in the contract, given he had already been unconditionally approved.
However, without this clause, his $70,000 deposit was ultimately at risk since his loan was declined.
Upon contacting his broker, he discovered that the bank required additional documents proving his wife's - to which the loan is named - income despite having already submitted bank statements and payslips, among other items, to the lender.
With his settlement date approaching, Mr Reza had no time to muck around.
Moxin Reza
"Luckily I was banking with NAB. I reached out to a banker to see what could be done. She mentioned that the loan needed to be transferred from my wife's name to mine," he shared.
After a few more bumps along the way - his valuation coming in lower, though he was able to negotiate the price down further using the 'subject to building and pest' condition - he finally secured the financing he was initially denied.
Lessons learned: The one who will own the property must also provide their income verification, and 'subject to finance' is a clause in a private settlement (i.e. not an auction, as they are unconditional) that can be very important.
What is unconditional approval?
When you receive unconditional approval on your home loan, it means the lender is committed to providing the financing after completing all necessary checks and verifications.
Unlike conditional approval (aka pre-approval) where the approval is contingent upon the borrower fulfilling specific requirements such as providing additional documentation, unconditional approval indicates that all conditions have been fulfilled and that the loan will be granted.
Once you reach this stage, you can confidently proceed to settlement, i.e. pay the balance of the purchase price, transfer the title from the seller to the buyer, and make the sale official and binding.
However, in rare cases, things could fall apart after unconditional approval.
Can a loan be declined after unconditional approval?
Yes, while extremely rare, a home loan can be denied after unconditional approval in certain circumstances. The formal approval letter from your lender will typically include the terms and conditions such as 'subject to further bank requirements' to enforce it.
A lender might re-evaluate and ultimately retract an unconditional approval for several reasons, the primary one being significant changes in the borrower's financial situation that can affect their ability to repay the loan.
"Lenders have an obligation to ensure serviceability of loans. Therefore, if any circumstances come to hand that dramatically alter the borrower's ability to service the loan before settlement, they must mitigate the risk by declining," explained Rebecca Moroney, principal buyers agent and owner of Wayfinder Agency.
Under the National Consumer Credit Protection Act (NACCP Act), lenders in Australia are required to take reasonable steps (i.e. making inquiries and conducting thorough checks) to confirm that a borrower can meet the loan repayments without undue hardship.
Reasons why your unconditionally approved loan was cancelled
1. Losing or changing jobs
A borrower's ability to repay the loan is heavily dependent on a stable and sufficient income, so a job loss introduces a significant risk of default, prompting lenders to reconsider the loan approval.
This can include pregnancy or going on parental leave that you didn't tell the lender about.
Similarly, changing jobs also rings alarm bells especially if the borrower is in a probationary period where employment is not fully secure.
If you've switched jobs since first applying for a home loan, you must inform your broker or lender as soon as possible. Your lender will assess whether your new position meets their criteria, otherwise it may result in your loan getting declined.
2. Change in credit score
Lenders continuously run checks on the financial health of applicants even after issuing unconditional approval. If significant changes are observed in your credit profile since applying for finance - such as new debts, defaults, or multiple credit enquiries - they may reassess the risk based on the updated information.
Bankruptcies and even relatively small things like missing a phone bill can negatively impact your credit history and cause the bank to decline your home loan. In some cases, lenders may offer to proceed with the loan but under revised terms such as a higher interest rate or requiring a larger deposit to mitigate the increased risk.
3. Assessment rate changes
Assessment rate increases can cause an unconditionally approved loan to be revoked if reassessment reveals that the borrower no longer meets the serviceability criteria.
This happens because when you apply for a home loan, the lender will assess your ability to repay the loan at the assessment rate, which is usually 2-3% higher than the interest rate. Think of it like a stress test on your financial situation. This ensures there is enough buffer for when rates rise in the future.
Suppose your initial approval was based on an assessment rate of 6% and the rate increases to 7%, your financial situation will be re-evaluated. With the higher rate, your borrowing capacity may decrease, and you may no longer be able to afford the mortgage repayments, potentially resulting in your loan being declined even after receiving unconditional approval.
4. Document discrepancies
Lenders rely on accurate documentation to verify a borrower's identity, employment, and financial status, so any inconsistencies can raise red flags and prompt a reconsideration of the unconditional approval.
Discrepancies in documents can damage trust and affect critical calculations such as serviceability, debt-to-income ratio, and asset values. Banks and lenders are also getting savvier at detecting fraudulent documents, such as doctored payslips, so these can be grounds for your loan being declined, too.
To prevent your approved loan from being denied, make sure you are fully transparent and provide accurate details and documents.
5. Legal and other issues
Any legal issues, such as disputes or changes in ownership of the property, may be viewed as a risk and can lead lenders to reassess and potentially cancel a loan approval.
Similarly, other issues arising after pre-settlement inspection, such as if the property is structurally unsound or suddenly damaged by a natural disaster, could make it ineligible for finance and result in the loan being declined.
6. Lender policy changes
Changes in the economic environment, such as a downturn in the housing market or an increase in interest rates, can trigger changes in lending policies and criteria to mitigate potential risks. Suppose your loan was approved under previous, more favourable conditions, it might be re-evaluated and declined if it does not align with the new policies designed to protect the lender from increased risk.
7. Non-compliance of pre-settlement requirements
Borrowers unable to meet all requirements during the settlement period may lose their approved mortgage. Lenders will want to see the contract signed, stamp duty and other fees paid, and lenders' mortgage insurance (LMI) purchased, if necessary.
Your bank may also require building insurance and a final property inspection duly completed. If any of these requirements are not satisfied, your unconditionally approved loan may be declined.
8. Formal approval expired
Depending on the lender, formal or unconditional approval is typically valid for 3-6 months. Failure to settle within this period can either lead to immediate rejection of your loan approval or trigger a reassessment. This reassessment may then uncover several issues that can result in your loan being declined.
Steps to take when your unconditional home loan is declined
Most lenders will provide a written explanation outlining the reasons why your unconditional approval was declined, although the level of detail and transparency can vary. If the initial explanation is unclear, you can request further information directly or through your broker.
1. Review the explanation
Carefully review any communication from the lender to fully understand the reasons behind their decision. This can help you rectify any mistakes and address the issues so you can be successful the next time you apply for a home loan.
2. Improve employment situation
Generally, lenders prefer to see you in a role for at least six months. If you moved jobs, wait until such time that you are stable in your new position before re-applying for a home loan.
If you are self-employed or a casual worker, show at least two years of consistent work and income to increase your chances of getting full approval. You may also consider applying for a low doc home loan or work with a broker to find lenders that may be accommodating to non-standard employment situations.
Whatever your employment status is, make sure that you have all the required documents including payslips and tax returns ready to go.
3. Check your credit report
If the decline is related to your credit history, obtain a copy of your credit report from one of the major credit reporting agencies (Equifax, Experian, or illion) to check for any inaccuracies or negative entries that may have influenced the lender's decision.
Fraud and scams are also on the rise; double-check to make sure your details haven't been compromised and someone has taken out a loan in your name. Rectify any errors as soon as possible, ensure timely repayments on any outstanding debts, and limit the number of new credit applications you make.
4. Boost your deposit
The last-minute decline may be due to your low deposit. In this case, increase your chances of getting approved for a home loan by building up substantial savings for the downpayment as well as establishing an emergency fund for unexpected expenses to demonstrate your financial stability to lenders.
Speaking from experience, Mr Reza, who's also a property advisor, shared, "Ensure you have some buffers sitting on the side to assist you … to cover the shortfall due to a lower valuation."
Alternatively, look for a lender offering 95% loan-to-value ratio (LVR) home loans, although you may need to have LMI in this scenario.
5. Consider a guarantor
If possible, "seek a guarantor like your parents or trusted family member who is happy to leverage their property value to strengthen your borrowing power," Ms Moroney said. With a guarantor, you may be able to access mortgage products up to 110% LVR.
For one of her clients who got declined an unconditionally approved loan after interest rates changed, Ms Moronoey said she was able to leverage points for a guarantor to increase their borrowing power.
6. Seek legal and professional advice
Consult with a legal expert or a mortgage broker to help you navigate the lending process and possible workaround if your unconditional approval is declined. Your mortgage broker can also help you find lenders with more flexible lending criteria or products better suited to your needs and circumstances.
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Header photo by Freepik
In-text photo courtesy of Mr Moxin Reza
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