There are several reasons why a person’s home loan application might be rejected. But the good news is there are steps you can take to make sure this doesn’t happen to you. We’ll outline those steps in this article.
Why might a home loan application be declined?
Bad credit history. Lenders are able to access your credit history when assessing your application. If you have defaulted on repayments on your previous loans or credit facilities (e.g. credit cards, utility bills), it will negatively affect your individual credit rating and therefore your potential to get a home loan approved.
Trying to borrow too much. One of the measures banks will use to assess your application is your loan to value ratio (LVR). This is calculated by assessing the amount you’re applying to borrow as a proportion of value of the home you want to buy. LVR is expressed as a percentage e.g. 80% LVR. Lenders will have policies about the maximum loan to value ratio they are prepared to accept.
Insufficient secure, regular income. Lenders will assess your regular income and ability to make loan repayments. Typically, lenders don’t approve home loan applicants needing to commit more than 30% of their pre-tax income to home loan repayments.
Unstable employment history. If you have been out of work for significant periods of time or can’t demonstrate a history of stable employment, the lender will doubt your ongoing ability to make home loan repayments.
Too much other debt. Banks also take into consideration the amount of credit card or personal loan debt you have as this could also affect your ability to make the necessary loan repayments.
Your proposed home doesn’t meet the lender’s criteria. For their own security, lenders won’t want to lend you money for a home that they think is over priced or might go down in value over time. There are a number of reasons why a property may decline in value. The property might be an apartment in a particular postcode with a large supply of apartments, or the house might need major structural repairs, or be located in an undesirable location.
If you are declined for a home loan application, it’s important to ask the lender the reason for their decision. That will allow you to take steps to rectify the situation for any future application .
How can I improve my chances of getting my home loan approved?
There are several ways you can improve your chances of qualifying for a home loan, such as:
Saving more for your deposit. This will take longer, but will improve your loan to value ratio, hopefully bringing it down to a level that your lender will accept. And if you are able to save more than 20% of the deposit for your home, you’ll also likely avoid the need to take out Lenders Mortgage Insurance, which will save you thousands of dollars.
Having a stable employment history. Lenders are more likely to approve a home loan for people who can show a stable and secure employment history. Keep this in mind if you’re thinking of changing jobs before applying for a home loan.
Paying off, consolidating or minimising any other debt. Try and pay off or at least consolidate or minimise any other debt you have (e.g. personal loans or credit cards) before applying for a home loan. This will also help you to develop a good credit rating. Remember, you need to demonstrate to the lender that you are capable of managing your debt and making the necessary repayments. This will be easier if you have no (or minimal) other debt repayment commitments.
Checking that your credit history is accurate. You have a right to access your own credit history information. If there is an error or inaccurate information contained in it, you also have the right to have that information corrected so that it won’t negatively affect your chances of a home loan approval. Accessing your credit file is free; simply search online for a credit reporting provider.
Getting your application paperwork in order. Make it easy for the lender to review your application by including all relevant, up-to-date and accurate information that demonstrates your capacity to make the home loan repayments (including your partner’s information, if applicable).
Seek advice from a finance professional before making your application. They’ll be able to advise you on how to put your best foot forward, and they’re also likely to be familiar with the lending criteria of different home loan providers.
As you can see, there are a number of steps you can take to improve your chances of getting your home loan approved.
It’s important to remember that different lenders have different lending policies. Just because you have been turned down with one lender does not mean you’ll be unable to get a home loan elsewhere, so it pays to shop around and understand the policies of the lender you’re thinking of applying with.
As Australia’s leading home loan comparison and referral service, Tomorrow Finance understands the Australian home loan market. Our team of lending specialists are committed to helping you find the right home loan, even if you’ve been declined with another lender.
To speak with our experts, phone 1300 754 562 or contact us online. There’s no obligation and our service is 100% free!Back « What to look for when buying a home?
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