Why Do Home Loans Get Rejected?
The number of home loans that are rejected every year in Australia depends on everything from lending standards to property prices. In 2019, it spiked to 40%, which was a more than 30% rise year-on-year. This rate can have a big impact on buyer behaviour, but there’s no reason to let it intimidate you.
Top Reasons Why Residential Property Loans Get Rejected
There are a variety of reasons why individual home loans are denied, so it helps to understand them when speaking to your broker about your application.
The most common reasons include:
- Defaults on credit report: Any overdue payments of 60 days or more will lower your chances of approval. Keep in mind that defaults and payments will give you a bad credit rating.
- Insufficient income: If a lender doesn’t think you make enough to meet your repayments based on your current daily expenses, this can cause them to deny the loan.
- Insufficient deposit: Your loan-to-value ratio will give the lender an idea of whether you can meet the minimum down payment on the home. Ideally, you should be aiming for around 20%.
- Other debts: From child support to student loans, the lender takes into account everything you owe and will check your debt-to-income ratio. If this is high, your home loan may get disapproved.
- Wrong information: Even one typo on your address or your ID number can cause your lender to reject your home loan application, so make sure you have an experienced broker on your side.
- Lack of savings or credit history: A lack of savings or credit history makes it difficult for the lender to determine what your financial habits are. If you fall into this category, start a savings account or show proof of your savings. Failing to present a bank statement that shows regular savings or repayment of credit card debts can negatively affect your home loan application.
Working with a trusted brokerage like Shore Financial can help you avoid these common pitfalls and guide you throughout the application process, including choosing the right bank for your specific needs.
How Do You Ensure Your Home Loan Gets Approved?
Here’s a rundown of the best ways to increase your chances of getting your home loan approved.
Check Your Credit
We recommend starting with your credit report. Now is the time to dig into where the problems lie and see what you can do to correct them. Some Australians may have mistakes on their reports, so it’s important to verify their accuracy before you check on anything else. You should also be paying off any debts you can and paring down other financial commitments. This will show the lender that you’ll have enough to settle your mortgage every month. The less of your credit you’re actually using, the happier the lender will be.
Save for a Downpayment
You should use the time before applying to determine how you can put more toward your downpayment. 20% may not be reasonable for you, but aim for as much as you can. If you can’t meet the 20% benchmark, you’ll end up paying for Lenders Mortgage Insurance (LMI), a charge that you pay on behalf of a lender for the insurance policy. This way, if you default, the bank is certain they are covered for their costs.
Wait It Out
Some people in a precarious financial position might wait until they get a promotion in their job or they’re offered a better salary somewhere else. This option is definitely one that will take some time to achieve, particularly because most lenders want to see you in the same position for at least six months.
However, if you can hold on and show a strong savings account as more money starts coming in, you’re much more likely to be approved. Keep in mind that if you’re borrowing more than 80% of the total price of the home, you might be required to show evidence of genuine savings, and it will need to equal at least 5% of the total price of the home. This shows the lender that you have some financial stability and the ability to save a substantial amount of money overtime. in case a major event (such as illness or job loss) unexpectedly occurs.
Talk to an Expert
Now is a good time to talk to a mortgage broker. If you find that you’re struggling to secure a home loan provider or just want to streamline the process, mortgage brokers are experts who understand how to match you with an institution that will help you rather than dismiss your application right off the bat.
Don’t Reapply Immediately
Some applicants might think it’s a matter of persistence, but this is not always the case.
It pays to wait rather than reapply immediately, so you can focus on building your savings and improving your credit rating.
If your home loan has been rejected, it’s vital to have a professional on your side who can help you navigate the loan application process and give you the best advice, so you have the confidence that your next application will be approved.
Contact Shore Financial for Help
From loan requirement interviews, paperwork and meeting with a lender, applying for a home loan can be difficult. The good news is that rejected home loans have a lot to do with which lender you apply to. Many borrowers — particularly first-home buyers — are shocked to learn how much variance they find between lender to lender. The Shore Financial team understands how the process works and what can be done to find a lender that will work for you. Contact us today to see how we can help make your home loan application as stress-free as possible.