Have you been dreaming of buying your very own home? Been saving up your deposit and mapping out your finances? Well, before you crack on with the house-hunting, it’s worth knowing that your mortgage application might get rejected. In this article, we will outline the ten biggest culprits to a lot of mortgage application rejections.
Reason why loan applications can get rejected
#1 Undisclosed Information and Omissions
Lenders must have all needed documentation in order to assess your credit worthiness before approving any loan applications. Omitting or lying about certain information could render it invalid and/or fraudulent.
Honesty is the best policy as lenders are going to go over your records with a fine toothed comb — make sure to not leave out or tamper with any details.
#2 Insufficient Income
Lenders need to be certain that borrowers will be able to afford the loan repayments and this is primarily judged based on their income. If your regular income is too low or inconsistent, then they may not be willing to accept your application.
#3 Poor Credit History
Before approving any loan, lenders will generally look over your credit history to determine whether you have a good record of paying off debt promptly and responsibly. An unfavourable credit score could result in rejection of the loan request.
#4 High Debt-to-Income Ratio
Your debt-to-income ratio (DTI) is calculated by taking into account all of your existing debts including loans and other credit commitments divided by your total gross annual income (before tax and other deductions).
A high DTI ratio can increase the risk for lenders resulting in the rejection of your loan request.
#5 No (or lack of) genuine savings
Having adequate savings showing consistent contributions over at least three months can help convince lenders of your financial stability and responsibility. Having no sufficient funds to demonstrate a reliable and stable income impacts your chances of getting approved for a mortgage.
#6 Your Choice of Property and Location
A lot of lenders have their own criteria for properties and the level of risk they assign to them. If the property is
- in bad condition;
- located in a dangerous neighbourhood;
- tiny (less than 40 square metres);
- in highrise buildings;
- in ‘blacklisted’ postcodes;
- near transmission lines; or
- has environmental issues;
lenders would be concerned about the value of the property and potential resale if you defaulted on the loan. As such, you would be hard pressed to get them to approved your application for a property with these concerns.
#7 Employment Status
Generally speaking, lenders prefer applicants who have a stable source of income and a good employment record. If you’ve gone job hopping in the past year or have been in jobs not longer than six months, lenders are going to look at your application unfavourably.
#8 Loan size
Banks often set limits on how much money can be lent based on particular criteria such as maximum loan sizes relative to total net annual salary/income etc. Exceeding these limits could potentially lead banks rejecting applications as they would view them as too risky – and you as a not-so-ideal borrower.
#9 Excessive expenses
Borrowers with bad spending habits, multiple luxury items, or other outgoings such as car loans and personal loans may not have enough disposable income left. Lenders might reject the application on the basis that repayment of the mortgage would become difficult for you in future months due to lack of financial flexibility.
#10 Very low deposit
Most banks prefer borrowers who are able to present 20% deposit – or more to limit their risk exposure. Anything less than 20% deposit will warrant the Lenders Mortgage Insurance (LMI) premium.
To avoid paying LMI if your deposit is less than 20%, you can take advantage of several first home buyer grants. Alternatively, you can also consult a mortgage broker to discuss your options.
FAQs on home loan applications:
How do banks assess loan applications?
Lenders and banks will take into account your income, lifestyle expenses, assets and liabilities, and lifestyle expenses or your current spending.
How long do loan applications take?
In general they take about 4-6 weeks, from application submission through to settlement.
Is it possible to get my loan declined after pre approval?
Yes. A pre-approval is just a preliminary step and not a guarantee of a successful loan application. A rejection can happen if you’ve switched jobs, the credit policies have changed, interest rates have increased, your lender finds new information from your records that could jeopardise your application, or you’ve had a major upheaval (e.g., going on a maternity leave).
Can a loan be denied after unconditional approval?
Yes, it’s possible to get your loan declined before settlement. This can happen for the same reasons outlined above.
I got my home loan declined when can I apply again?
We advise you to not immediately apply after the rejection and to reflect on the reasons why it happened. Doing so will give you a concrete idea on how to improve your chances on your next application. Wait for several months (ideally six to twelve months) before trying again.
Improve your chances with the help of trusted mortgage brokers
If you’re planning on buying a home in the near future, make sure you avoid these mistakes to avoid getting rejected. Make sure you give yourself the best chance of success and get in touch with Q Financial. We can help you avoid any potential mortgage application rejections and get you on to the property ladder sooner rather than later.
