Navigating a home loan application can often be a long and complicated process. Often after the hours of stress and effort you’ve spent, you can still be rejected.
A survey conducted by Digital Finance Analytics found that approximately 40% of home loans were rejected in December 2018.
A mortgage is a long term commitment and a significant financial investment. For this reason, lenders need to be careful who they lend to. Additionally, you also need to ensure that the particular home loan is right for your situation. There’s nothing more stressful than ending up with a home loan that you can’t easily maintain or pay off.
With this in mind, Joseph Daoud from It’s Simple explains that there are a few common reasons why your home loan application might be rejected and gives tips on how to avoid them.
“Being aware of these reasons from the beginning of your application can save the energy, time and headache of having to resubmit, or redo your home loan application,” explains Joseph.
The short guide below outlines the 5 most common reasons why your home loan won’t be approved and what you can do to avoid them.
- Misunderstanding the concept of ‘servicing’
Servicing is the concept of one’s ability to repay the loan. The common misconception is that it’s as simple as income in vs income out. But servicing also includes something called ‘buffering’.
Buffering includes an assessment of your home loan at a higher interest rate, to ensure that you are able to keep up with repayments when interest rates eventually go up.
“Because of this extra step it’s always good to speak to a bank or broker. This way they can calculate your servicing and maximum borrowing capacity. Additionally, things like your income, open credit facilities and any study debt can also affect your maximum borrowing capacity,” says Joseph.
Many people are either gifted a deposit or receive an inheritance and think that’s enough to purchase a property without talking to a bank or broker. In reality, it’s usually not.
- Bad credit history
Unfortunately the mistakes of our past can come back to haunt us if we’re not careful. The laws and regulations to be able to open a ZipPay or Afterpay account, or simply open a credit card are much more relaxed to that of a home loan, and being able to open such accounts at an early age, without understanding the implications can have a damaging affect on your credit history.
These are all forms of credit and if you default now, it can affect our home loan application in the future.
“If you’re considering applying for a home loan somewhere down the track it’s important to be aware of your credit history.”
“Be careful with your credit card debts, personal loans or after pay accounts. Keeping your record squeaky clean now will pay off when you’re applying for a home loan in the future.”
- Not having enough money for the deposit
Your home loan might be rejected if you don’t meet the lender’s minimum deposit requirement. Each property will have a set loan to value ratio (LVR) which stipulates how much you can borrow in relation to how much the total home loan is.
Many financial lenders have stepped into the realm of offering 5% deposits in order to be able to exchange a contract and secure. However, real estate agents are not governed by the same as those in the realm of finance. Therefore, a real estate agent will not look at the lender’s mortgage insurance implications, the buyer’s potential servicing or the impact a 5% deposit will have on their interest rates. This can lead to an application being rejected.
“If you work with a mortgage broker they will be able to calculate which properties you are eligible to apply for. This will save you the complicated process of figuring it out yourself. Or the disappointment of being rejected for applying for a home loan with an LVR that you can’t meet,” explains Joseph.
- Your employment type
Unfortunately, the type of employment you have can lead to your application being rejected. The most common situation this occurs for is those with casual employment.
“Some banks will calculate 48 weeks of a casual income per year as an average method of hours worked, whilst other banks will base it on the full 52 weeks. If you’re a casual employee, it’s always best to speak to multiple lenders to find a solution for you.”
- Applying with the wrong lender
This is a common mistake applicants make without realising it. By going to the wrong lender you simply may not be suitable for their requirements.
“Each lender has its own risk profile in regards to; employment type, LVR acceptable, income assessment and buffering rate for interest rates,” says Joseph.
You might end up being rejected by numerous borrowers just for not researching their terms and requirements thoroughly enough. To overcome this, Joey recommends either spending the time and energy doing your research or working with a professional broker.
Home loan applications can be complicated, and there’s a good reason for it. Mortgages are a long term commitment and involve a large sum of money. Doing thorough research into your chosen lender, or working with a professional broker can save you time, money and the disappointment of being rejected.