No one likes to be rejected, especially when it comes to home-loan applications. A home-loan approval gives you the key towards achieving the Great Australian Dream, making it quite confusing and frustrating when your mortgage application gets denied.
However, instead of looking at rejection as a major roadblock to achieving your dream home, consider it as an opportunity to learn more about home-loan application process and improve your chances of getting approved the next time. If ever you find yourselves rejected for a home loan, these are the things you should do:
Find out why your lender rejected your loan
It is easy for anyone to start over when they know where they fell short. The first thing you have to do after a home loan rejection is to find out why your chosen lender denied your application. This is fairly easy, given that lenders are required to disclose why your application was rejected.
Here are some of the common reasons why a home-loan application might get the chop:
1. Defaults on your credit report
Defaults are one of the main reasons why mortgage applications are not approved. The more overdue payments of more than 60 days are in your credit report, the lower the chances you have of getting approved. Lenders base their decisions on your credit score — defaults and missed payments will give you a bad credit rating.
2. Inadequate income
Income is another indicator that will tell your lender about your financial capacity to service your home loan. Lenders want to see how paying monthly repayments will affect your budget and if your income is still sufficient enough to meet your day-to-day needs.
3. Insufficient deposit
When you apply for a home loan, see to it that you meet your lender's loan-to-value ratio (LVR) requirement. This entails meeting the minimum amount of deposit needed for the purchase of the property. Typical LVR requirement is 80%, meaning you should be able to pay for 20% of your property's value out of your own pocket.
4. Other debts and financial obligations
Your lender will most likely check your other financial obligations when assessing your home loan application. The lender will compute how much of your income is used to repay these debts. If your debt-to-income ratio is high, you might not get approved for a home loan.
5. Inaccurate information
It is important for you to supply your lender with accurate information. A simple misspelling of your address or mistyping of an ID number can lead to rejection, especially if your lender is unable to verify the supplied information. When your lender requires you to submit additional documents, do so promptly.
6. No savings history
In order to show your banks how good you are at managing finances, you have to present them with proof of genuine savings. If you fail to show a bank statement showing regular contributions towards your savings account, your home loan application might be affected.
7. No credit history
It is important to build your credit score if you are planning to make big purchases such as buying a home or a car. As mentioned earlier, lenders primarily use your credit score in analysing your home loan application. Most of the time, your credit rating can make or break your home loan application — your lender will ultimate use it as a deciding factor on whether to approve or reject you. If you do not have any credit history, applying for a credit card is a great start.
Get a copy of your credit report and look for red flags
The right way to start your next move is to check your credit report, especially if the rejection of your home loan is because of your credit score.
To get yourselves ahead of the game, be sure that you check your credit score for errors. A company which you have transacted with before can commit errors and might tag you with a default or missed payment. Fix your credit report the soonest to make sure you get approved the next time you apply for a home loan.
Strategize to boost your chances of getting approved
There are a lot of things you can do to increase the chances of getting approved the next time you apply for a home loan. Never reapply immediately to another lender if your first application got rejected — it will only worsen your chances of getting the go signal. Instead, wait for a considerable amount of time and do these things that can help boost your financial capability.
1. Pay off other debts
In order to be in a better financial standing, consider settling your other obligations first. Pay off your outstanding bills first and reduce your credit card usage. This will improve your debt-to-income ratio.
2. Save for a larger down payment
If you borrow less, the chances of your application getting the green light will be higher. Try to save for a bigger deposit — it's not enough to just meet the LVR requirement of your lender. If you have a larger deposit, your monthly repayments will also be lower.
3. Consult a mortgage broker
If you are finding it a struggle to look for a home loan provider, consider enlisting the help of a broker. Mortgage brokers are professionals who can help you find the right institution where you have a higher chance of getting a better home-loan deal.
4. Increase your income
This is not easy to achieve. Unless you get promoted to a higher position at work or you shifted to a higher-paying job, increasing your income is definitely not an overnight task. Most lenders would require you to be on your current position for at least six months, so timing is vital when changing your career.