7 reasons your home loan application got declined

Red Denied stamp on application.

Knowing why your home loan application was knocked back can help your next application succeed.

Having your home loan application declined can be a heartbreaking experience. When you've got your sights and heart set on getting into the property market, finding out your finance didn't get approved is a major setback.

Fortunately, a rejected home loan application doesn't have to derail your home buying dreams. Knowing why your application might have been declined is the first step in getting your next application back on track.

1. Your income isn't high enough

Lenders assessing your home loan application need to see that you'll be able to repay your home loan. The ability to meet ongoing mortgage repayments is called serviceability. A big part of serviceability is your income.

Lenders will count income from a variety of sources, whether it be your job, rental income or even some Centrelink payments. But if all these sources of income don't allow you to comfortably service a home loan, you may find your application declined.

What can I do about it?

The obvious solution is to boost your income. It could be time to ask your employer for a raise, or to consider taking on some part-time work to supplement your resources. However, this isn't an option for everyone. If you can't boost your income, you can try applying for a smaller loan amount.

Moreover, some states such as Western Australia, Queensland and Victoria have shared equity schemes that allow low income earners to access the property market. In these arrangements, the state government pays part of the purchase price of a home for eligible applicants and recoups its investment when the home is sold. South Australia's HomeStart program also caters to low income individuals.

2. You have too much existing debt

Another key factor in home loan serviceability is your amount of existing debt. Lenders will look at your current debt obligations and determine whether or not you'll be able to manage home loan repayments on top of your existing commitments.

When lenders assess your debt, they'll take into account any personal loans, car loans and credit cards, as well as HECS and HELP debt. It's important to note that lenders will assess your credit card debt based on the combined limit of all your credit cards rather than the cards' actual balance.

What can I do about it?

Start reducing debt right now. Think about reducing the limit on your credit cards. You might even consider consolidating your cards into one with a 0% balance transfer.

Before you re-apply, spend a few months paying down your obligations, and make sure to close any credit accounts you no longer need.

3. Your deposit isn't big enough

Lenders will want you to save a deposit to show that you’ve developed some financial discipline. While some lenders will accept a deposit as small as 5%, if you have a deposit of less than 20% you’ll end up paying for lenders mortgage insurance (LMI), an insurance policy that covers your lender in the event you default on your home loan.

If you’ve applied for a home loan with less than a 5% deposit, it could be the reason your application was rejected. Even if you have saved for a deposit, you may have to take other costs into account such as stamp duty, mortgage transfer fees, and legal and conveyancing fees.

What can I do about it?

Before you apply, try saving a larger deposit. We’ve put together a helpful guide to walk you through the process of saving your home loan deposit.

If saving a deposit isn’t possible, you may still be able to get a home loan if your parents or another close family member will serve as guarantor. This means they offer their own home as security in lieu of a cash deposit. However, where possible, it’s always better to save your own deposit.

4. Your property isn't acceptable

If you're buying a unique property, it's possible this is the reason your home loan application has been declined. Lenders carefully scrutinise the property you're buying because it will serve as security on your home loan. In other words, the property will be sold to recoup the lender's loss in the event you default on your home loan.

Because of this, lenders want to make sure your property is one they'll be able to sell should it become necessary. Many lenders will be hesitant to lend for properties under 50 square metres, those in extremely rural areas or properties with titles that restrict their use.

What can I do about it?

Different lenders have different criteria concerning the properties they'll accept as security. It's worth researching lenders and perhaps speaking to a mortgage broker to see if there are lenders who can help finance your property.

Some lenders are more willing to finance unique properties if you've saved up a larger deposit. Some even specialise in certain types of property. A broker can help you sort through specialist lenders and find the right option for you.

5. Your credit history is bad

If you've had a number of late payments, defaults or judgements, you could face a tough time with many lenders. If you've been bankrupt, home loan approval can be even more challenging.

Lenders will judge the likelihood that you'll keep on top of your home loan repayments by examining the way you've managed debt in the past. If you've built up a history of struggling with debt obligations, it can seriously hurt your application's chances of success.

What can I do about it?

Some lenders specialise in helping borrowers with bad credit. If you've been knocked back by a mainstream lender, it may be time to turn to a specialist.

You may also want to consider credit repair. Credit repair can help remove any mistaken negative marks on your credit file.

6. Your employment history is short

Lenders want to see that you have stable income and that your future employment is secure. If you've been in your current role for a short amount of time, it may be the reason your application has been knocked back.

For PAYG employees, most lenders want 12 months' work history with your current employer. For self-employed borrowers, lenders will want to see that you've run your business for at least two years.

What can I do about it?

There are exceptions to this. Some lenders will accept your application even if you're new to a job, so long as you've been working in the same industry for a number of years. However, you can eliminate some of the uncertainty by waiting a bit longer to apply until you're more tenured in your current role.

7. You've applied too many times

Every time you apply for credit, the application is listed on your credit file. Too many applications can be a red flag for lenders. They show that you have too big an appetite for credit and that you may have already been knocked back by a number of credit providers.

What can I do about it?

If you've over-applied, try waiting six months before applying for a home loan again. While it may be difficult to put your property ambitions on hold, you'll increase your chances of success if you take some time off from applying for credit.

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Image: Shutterstock

Adam Smith

Adam has more than five years of experience writing about the Australian home loan market.

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