For any aspiring homebuyer, the most heartbreaking news to hear is the rejection of a home loan application.
However, instead of looking at rejection as a major roadblock to achieving your dream home, consider it as an opportunity to learn more about the home loan application process and improve your chances of getting approved next time.
- Why was your home loan application rejected?
- Unexpected reasons for home loan rejection
- How to boost your chances of home loan approval
Why was your home loan application rejected?
It’s easier to start over when you know where you fell short in your application.
The first thing 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 generally required to disclose why your application was rejected.
Here are some of the more common reasons why a home loan application might get rejected.
1. Defaults on your credit report
Defaults are one of the main reasons why mortgage applications are not approved. The more overdue payments that 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 to meet your day-to-day needs.
Use our mortgage repayment calculator to have an idea how much your home loan repayments would be.
3. Insufficient deposit
When you apply for a home loan, it’s important to 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. The 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 calculate 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. Non-existent savings history
In order to show the lender how good you are at managing your 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. Lack of 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 ultimately 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.
Unexpected reasons for home loan rejection
If you feel like your situation does not fit the reasons above, there might be another reason why your chosen lender did not give you the green light.
1. You may have the wrong property
The truth of the matter is that there are some properties lenders don't like.
Buyers of these types of properties will always struggle to get finance because banks tend to put them in the "too hard basket".
The wrong property can include small studio apartments, some high-rise developments, certain postcodes (such as mining areas), unfinished renovations, properties located near high voltage powerlines, and properties that are in a bad state of repair.
The thing is no matter whether you can afford to service the loan, the lender will also consider whether it is prepared to finance a property that might be hard to sell in the future.
As you know, your lender may end up having to sell your property if you default on your repayments so if the property is one that fails to sell or which may sell at a significant discount to what you paid, they might also not get their money back.
2. Your lender might have changed its policies
Your lender might consider changing their policies to adapt to changing regulations or market movements.
For instance, when the Australian Prudential Regulation Authority (APRA) raised concerns about the number of investors in the market, lenders had to reduce their investor as well as their interest-only loan ratios, which means that products that were there a few months ago are no longer available.
What it boils down to is that it has become more difficult for some people to get a loan approved with lenders requiring larger deposits, lower loan-to-value ratios, or borrowers paying principal and interest rather than interest-only.
The conclusion is that there’s not much you can do about lenders changing their policies, but you can be aware of what's available and what's not to increase your chances of success.
To help you get to know some of the best lenders in Australia, click here: home loan lenders
3. You have suspicious records on your credit file
You must understand what's in your credit file because mistakes can sometimes occur due to the sheer number of entities that you probably have financial connections with.
This might prompt your lender to raise a red flag on your application, and ultimately deny you access to their loan products due to these unexplainable connections.
Know your credit file details and fix any mistakes sooner rather than later to improve your chances of loan success. The lesson from all of this is that there are a number of variables that lenders use to assess every loan application.
What can you do 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. However, here’s one important reminder: Never reapply immediately to another lender if your first application got rejected.
Applying days or just a week after getting rejected will only worsen your chances of getting the green light. Instead, wait for a considerable amount of time and do the following things that can help boost your financial capability.
1. Get a copy of your credit report and look for any 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 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 default or missed payment. Fix your credit report quickly to make sure you get approved the next time you apply for a home loan.
2. Pay off other debts
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.
3. 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.
4. 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.
5. Increase your income
This is not always an easy thing 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 in your current position for at least six months, so timing is vital when changing your career.
Where to turn if your home is declined?
If the problem is simply a case of missing out on the loan due to having $1,500 on a credit card, or even just having $1,500 too much on your actual limit of your credit card, then that should be an easy fix if you have some savings or a regular salary. Walker recommends that you clear the debt, reduce the limit of your card, and cancel the card altogether if you don’t use it.
- Make sure that all paperwork provided is up-to-date. “Most recent payslips, not three months ago,” Walker says.
- Clear any credit card debt you can before applying again.
- Make it as easy as possible for the lender to process your application by checking that what you have provided in paperwork (such as payslips, which include income and overtime) match what you have claimed you earn on your initial application for the loan.
- Check your credit file at websites such as www.mycreditfile.com.au and if there is something on there you did not expect, then see if you negotiate it to be removed or adjusted.
- Use a broker rather than going direct to a bank. “Brokers can negotiate with lenders for applicants and will be able to warn applicants upfront before they submit an application if there are any potential issues, to avoid being declined in the first place,” Walker says. “A broker can also source the best lender available in relation to your circumstances, and they know their way around the different lending criteria each lender has.”