Being rejected by your bank after you’ve applied for a home loan can be pretty devastating, especially if you’ve saved up for a dream home in a great neighbourhood.
Fortunately, your dream of finally owning your own home doesn’t have to die a bitter death. Listed here are the main reasons why people get their home loans rejected and what they can do to avoid rejection.
Banks consider your capacity to service the loan.
Your capacity to service the loan isn’t about whether your income can cover your home loan, but about whether your lifestyle and personal expenses make repayments feasible. While you can promise to give up luxuries like buying DVDs and going to the salon every fortnight, such deprivations aren’t always realistic. Banks know this and weigh in your lifestyle and personal expenses when considering your loan application.
“It is really that balance of [the borrower] maintaining their lifestyle — the cost of that, their income, and then whatever they have left to service the loan,” said Patrick Nolan, Head of Home Loans at ME Bank.
“How much of your income are you using to maintain your lifestyle per week? We look at those expenses and marry that up to your income. Then in addition to that we look at how much you can afford to service that loan and those repayments.”
Banks also want to see evidence of genuine savings. This is particularly important right now since rising median house prices and stagnating incomes means many younger Aussies are relying on mum and dad to assist with the deposit.
Even if parents gift their children with cash to help them onto the property ladder, that doesn’t guarantee the loan will be approved. The borrower will have to prove that they can afford the mortgage and manage the repayments without assistance from a third party.
Banks check your credit history.
If you have a tainted credit history, banks will be less willing to approve your home loan. Banks will examine both your internal and external credit histories. Your internal credit history is your credit history within the banks (credit or loan defaults), whereas your external credit history is your credit history outside the banks (outstanding bills).
“There is a lot of data and a lot of science behind this that…illustrates that your previous history is usually a very strong indicator of how you will perform going forward,” Nolan said.
While the state of your credit history is clearly important, the good news is that an adverse credit history isn’t the end of the world. You can still successfully apply for a home loan if you understand your credit history. This includes being aware of your credit score and what’s on your file and being proactive about it.
“The real opportunity for a customer if they have had a ‘black mark’ is to establish and be able to demonstrate a really good savings pattern,” Nolan said. “And then, in that situation, to be able to explain to the bank why that event occurred, which meant you weren’t able to pay off that loan or that debt owed and to illustrate what has changed between now and then.”
Banks determine if you’re a wise investment.
Banks aren’t major risk takers. Hence, if they don’t think you’re a wise investment, they’ll either deny your loan or make it difficult for you to borrow. Just as importantly, where you want to buy and what type of property you’d like to buy could affect your chances of being approved.
A major example of this is apartments in inner-city areas, where looming oversupply has become a concern.
“There has been a bit of a boom in the building of [apartments], particularly in Melbourne, Sydney and Brisbane,” Nolan said. “A lot of the banks now in the CBD area want to understand who built the developments, what it looks like and how many apartments are in there so they can get a handle of what that looks like.”
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan