Why was my home loan application rejected?

It's a nightmare scenario. You've found a great home and you've made an offer. The seller accepts and the home is yours. But then the lender rejects your home loan application.

If you've been rejected for a home loan, you first need to work out why. Is there a problem with your credit history? Is your deposit too small? Did you miss some paperwork in the application? Then you need to take steps to make a stronger application next time.

Why was my home loan application rejected?

Each lender imposes its own lending criteria on the mortgages it offers. Some common reasons why lenders reject loan applications include:

• Defaults on your credit file. Your credit file records the current loans in your name, previous loan applications and whether you have failed to pay a bill on time or even defaulted on your loan. If there are black marks in your file, such as defaults or bankruptcy, they will count against you when your application is being assessed. It’s a good idea to request a copy of your credit file before you apply for a loan so that you can take steps to repair your credit history if required.
• Small deposit. The maximum loan to value ratio (LVR) is the maximum amount you are allowed to borrow, expressed as a percentage of the value of the property you want to buy. For example, if a loan has a maximum LVR of 80%, you’ll need a deposit of at least 20%.
• No proof of savings. Lenders will also request proof of genuine savings, which usually takes the form of a bank statement showing regular contributions into a savings account over at least 3 months. If you can’t provide this proof because the deposit amount was a gift from your parents, for example, your chances of approval may be affected.
• Borrowing too much. If you’re a low-income earner and you want to take out a loan to buy an expensive property, the lender might decide that you’re setting your sights too high. If you’re unlikely to be able to afford making regular loan repayments now and into the future, your home loan application will be rejected.
• The property is overpriced. Before approving any home loan, a lender will have the property you want to purchase professionally valued. If you’re paying much more for the property than what the bank deems to be a fair price, your lender may be worried that it will be unable to recoup its losses if you default on the loan and it has to sell the property.
• Property issues. Some lenders don’t offer finance for studio apartments or for apartments with less than 50 square metres of floor space. Others may look to limit their exposure to certain risks. For example, if a lender has already financed several loans for apartment purchases in a new high-rise development, it may choose to not offer any more loans for apartments in that same development.
• Failing to provide documentation. From employment and contact details to information about your financial situation and the property you want to buy, lenders request a substantial amount of information when you apply for a loan. If you can’t provide all the necessary details in a timely fashion, your application could be refused.

What can I do to improve my chances of approval?

Having your application rejected can be disappointing, but there are plenty of steps you can take to boost your chances of approval next time you apply for a loan. You can:

• Save a larger deposit. The larger the deposit you have, the more likely you are to be approved. Not only will saving a larger deposit mean that you borrow a smaller amount and pay less interest, you may be able to avoid the additional expense of lenders mortgage insurance (LMI) if you borrow less than 80% LVR.
• Be realistic. That multi-million-dollar waterfront mansion might be the home of your dreams, but it may not be a realistic goal in your current financial situation. Work out how much you can afford to borrow and repay before you decide which properties are in your price bracket.
• Pay off your debts. If you’re paying off a car, a couple of credit cards and other debts, these repayments will eat into your monthly income and count against you when your application is being assessed. Taking the time to pay off all your debts – you might want to look at consolidating all your separate debts into a single loan – will put you in a good position the next time you apply.
• Make regular savings contributions. If you can provide proof of regular contributions into a savings account over a period of several months or more, you can quickly and easily demonstrate your financial discipline to your lender. Consider setting up a weekly, fortnightly or monthly direct debit into your savings account.
• Job security. If you can show that you’ve been employed by the same company for more than 2 years or worked in the same industry for 12 months, you’ll be able to demonstrate job stability and a reliable income source to your lender.
• Do your real estate homework. Before you decide on a property to buy, do your research and examine current market trends and what similar properties in the area are worth. This will help you work out whether you are paying a fair price for a property or being overcharged.
• Don’t apply for multiple loans. Every credit application you make shows up in your credit history, so don’t be a serial loan applier. This will be viewed in a very negative light by potential lenders.

My loan was declined: When can I apply again?

So your loan application was rejected. Before you start applying elsewhere, make sure you know exactly why your loan was rejected. The lender should be able to tell you why. It could be that you'd chosen an inappropriate loan type for your situation. Maybe your financial position is not bad but you're borrowing too much relative to your income. Or you may have a poor credit history you need to work on.

Avoid applying again until you work out why you were rejected. If the issue is because of your spending habits or credit history, it may take between 3 and 6 months to get your finances looking better.

I need a home loan but I keep getting rejected! What do I do?

Try a mortgage broker

If you didn’t have a broker in the first place, it might be wise to enlist a professional mortgage broker's help once you get your first rejection. They can work with you to make sure you’re presenting all your information in the best possible light and also help steer you in the direction of a lending institution that might give you a better chance of getting your loan across the line.

Wait and reapply

The absolute safest course of action is to wait 6 months, get your finances in order and reapply. Avoid applying to another lender immediately after you've been rejected as this can have a negative effect on your credit file. Instead, try to pay down existing debts, save a larger deposit and reapply once you're in a better financial position.