Why was my home loan application rejected?
You’ve saved your deposit, made an offer, done the paperwork, jumped through all the hoops only to be rejected by the bank. Here are some of the reasons the bank might say no to your home loan application.
Small deposit
Most banks need you to have, at the very minimum, a 5% deposit saved. Most prefer you have closer to 10-20% plus costs such as stamp duty, legal fees and application fees.
Bad credit history
All lenders in Australia will check your credit file when you apply for a home loan. If you have bad credit history such as not paying on time, defaulting on loans and have multiple credit accounts - this all affects your credit worthiness. A bad credit history can be one of the reasons the bank might say no.
Bad credit conduct
Some of the major lenders are really tough on people who were past clients and had bad conduct. This means even up to 10 years ago, if you missed repayments or were overdrawn, they’ll be harder on your application than someone who has been banking somewhere else.
Employment status
If you are unemployed, have been in your current job less than 12 months or been self-employed for less than 2 years then the lender may decline your application. There are other lending alternatives for these scenarios, so it is worth chatting with your trusted Mortgage Broker before applying for your home loan to understand how best to ensure your success.
Over the age 45
Recently home loan lenders have begun to require solid exit strategies. If you are applying for a 30-year loan at age 45, the bank will want to know how you plan on making repayments on the loan after you retire. If you haven’t got a plan in place, then they may decline your home loan application.
Security not suitable
Many banks want to ensure the property you are buying is going to be a good investment for them. If they have to sell the house because you default on your home loan down the track, they want to know they are going to get their money back.
Some properties which are harder to finance include tiny homes, high-density CBD apartments smaller than 50 square meters, rural property on acreage or closer to urban infrastructure like transmission power lines.
Location is too risky
This might come as a shock, but some lenders have blacklisted certain postcodes. If you try to buy a property in these areas you may be knocked back, even if every other aspect of your home loan application is acceptable to the lender.
Some postcodes are blacklisted due to being at high risk of floods or cyclones, others due to the kind of developments and building that is taking place. As is often said when it comes to property, location is everything.
Expenses too high
Lots of people are happy to make changes once they get their home loan, as they know the importance of making their repayments. But many lenders want to see you can manage this before they offer you a home loan. This means three months of good conduct, ensuring you don’t spend more than you earn.
If you are spending too much, then the lender may knock you back until you can get it under control. They like to see that you can manage your money, won’t neglect to make essential payments on your home loans and that you are able to budget responsibly into the future.
Too much debt
Banks use a debt to income ratio to determine how much they are going to lend to you. So whilst you may be able to make the minimum repayments on all of your debt comfortably, if your debt to income (DTI) ratio creeps up too high, they won’t be able to lend you any more.
Non-disclosure
Lying on your home loan application will get you declined. If you have a credit card or loan you took out, but didn’t mention it or forgot something crucial like child support or your employment status, they will be very cautious in approving your home loan application.
It could also affect your ability to get a home loan somewhere else if you need lenders mortgage insurance (LMI). There are only two LMI providers in Australia. If they know you’ve been declined by one bank for non-disclosure, chances are you are going to be declined by every other bank that also uses that LMI provider.
Baby on the way
If you are pregnant and about to go on maternity leave, the banks might not approve the home loan. The main reason being loss of current and future income. Even if you receive maternity leave payments and are planning to return to work once those payments are ended, the bank won’t consider offering you the home loan until after you’re back at work.
If you are deciding whether to buy a house or have a baby, it could be smart to secure the house first to improve your chances of getting approved.
Residency status
Some lenders won’t offer home loans to those who are living in Australia on a visa. They would require you to be a permanent resident or a citizen to approve the home loan application.
The little things
It might not be one single thing that makes the bank say no to your home loan application. It could be the overall picture of a high loan to value ration (LVR), low deposit and poor management of expenses which all come together to cause the declined application.
Your trusted Mortgage Broker
A lot of the above mentioned factors can be easily overcome by speaking with a qualified Mortgage Broker. They will be able to discuss in detail:
your current situation including income and expenses
your current employment situation
the type of properties you are looking at
review your credit file upfront
run through your future plans
Once your trusted Mortgage Broker understands your goals and circumstances, they can explain what lenders are available to you, and how much they are prepared to lend to you.
If you are looking at a special type of property, they can also discuss with you who is most likely to approve your home loan application.
Working with a trusted and qualified Mortgage Broker will help you to overcome some of the common reasons a bank might decline your next home loan application.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.