After months of searching, you’ve finally found the right property and the home loan you need to make the purchase. All you need is your bank to come on board and offer you a loan. However, much to your dismay, your home loan application is rejected.
Not only can a rejected application prevent you from getting your ideal home, it can also stay on your credit file and hurt your chances of having future loan applications approved. So let’s take a look at some common reasons why lenders refuse home loan applications as well as what you can do to ensure your application is approved.
Why was my home loan application rejected?
Each lender imposes its own lending criteria on the mortgages it offers. These criteria are in place to ensure that every borrower the bank loans money to will be able to service the loan and does not pose an unacceptable level of risk of defaulting on their mortgage.
Some common reasons why lenders reject loan applications include:
- Defaults on credit file. Your credit report plays a crucial role in the home loan application process. 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.
- Not enough of a deposit. Every home loan you see has a range of terms and conditions attached, one of which is the maximum loan-to-valuation ratio (LVR). This 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 three 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.
- Biting off more than you can chew. 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. Under Australian law, credit providers have a duty to lend money responsibly. 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.
- Unsatisfactory debt-to-income ratio. As part of the application process you will need to provide details of any debts in your name, as well as the income you earn. The lender will use this information to work out how much of your monthly income you use to service your debts, and therefore how likely you are to be able to afford mortgage repayments.
- 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.
- Other property issues. Some lenders will simply exclude certain properties from lending. For example, 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.
- 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 one 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 two 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.
What if my application is referred to an assessor?
Many loan applications are referred for manual assessment, and this could be for a variety of reasons. It could indicate that your loan application contains some intricacies that require a second look. It could mean that the lender requires some extra documentation. It could merely mean that the lender you have chosen sends applications for manual assessment as a part of their standard credit assessment process. What it does not necessarily mean is that your loan application will be rejected.
If you see your application has been referred for manual assessment, the best course of action is to remain patient and wait for further communication from your lender. If manual assessment does lead to your application being rejected, speak to your mortgage broker about what further steps you can take.
What can I do if I've been rejected?
1. Try a mortgage broker
If you didn’t have a broker in the first place, it might be wise to enlist their 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 you might give you a better chance of getting your loan across the line.
2. Try a mortgage manager
Mortgage managers offer you a boutique style service – where they’ll represent you for the duration of your loan, not just during the application process that mortgage brokers help out with. They organise funding from a variety of sources and are safe as they do not lend their own money.
3. Wait and reapply
The absolute safest course of action is to wait six 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.
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