What happens if my mortgage application gets rejected?

What to do when your home loan application has been denied.

So you’ve finally decided to take the plunge and purchase your first home, but you’ve hit a bump in the road and your home loan application was declined. What now?

Fortunately, a denied home loan application doesn’t have to mean the end of your journey. Below, we explore the reasons behind a rejected application and what you can do next to get back on track.

Why was my home loan application denied?

Understanding why your application was denied is essential to not making the same mistakes twice. With so many factors your lender has to consider before you get approved, it’s easy to miss something. Here are some common reasons you might find your home loan application is denied.

  • There’s no evidence you can pay it off. If there isn’t evidence you can service your debt, your lender might reject your application. It’s important you provide evidence of consistent income so your lender knows you can pay even if interest rates rise.
  • You’ve got a bad credit history. Home loan providers use your credit score to assess how reliable you are as a borrower and a bad credit history means you pose more risk to your lender.
  • Low deposit. While there are some loans available for borrowers with a 10% or even 5% deposit, if you’ve saved less than 20% of a property’s value for a deposit this may pose a problem, especially if there’s little evidence of genuine savings.
  • Unsuitable loan structure. With so many types of home loans on the market, it’s hard to know which one to choose. Your loan can be denied if your lender doesn’t think the loan type you’ve made an application for is the right fit.

Interest-only loans are riskier for banks because you’re not paying off the loan principal, so the lending criteria is often tighter. With principal and interest loans, you’re paying back interest and also chipping away at the loan principal so you’re more likely to be approved because it’s less risk for the bank.

What if I've already bought a house?

It’s one thing to miss out on a home loan when you haven’t yet signed on the dotted line - you’ve still got plenty of time to improve your financial situation and try again. But what happens if you’ve already agreed to buy a property and then your lender disapproved your home loan application?

If you’ve bought through a private treaty, there’s usually a cooling-off period of three to five business days during which you can opt to get out of your contract (for a fee), or use the time before settlement to find another loan.

If you’ve bought at an auction, there’s no cooling off period so you’ll have to apply for another loan before settlement or fork up exorbitant amounts to break the contract. You also run the risk of losing your deposit. This is why having pre-approval arranged is so important, so you know you’re actually able to finance the home before winning the auction.

What if I already have a loan and want to refinance?

If you've already got a mortgage, approval for a refinancing loan should be a sure thing, right? Unfortunately, not always. If your personal circumstances, such as your employment or income, have changed, or the lending criteria has become stricter since your first home loan application, you can be knocked back by your lender.

One good tip is to reduce your debt-to-income ratio by paying off financial liabilities such as credit card debts, car loans or personal loans. You can also opt to pay off more of your home loan and reduce your LVR, which can also help your approval chances.

Steps you can take to improve your next loan application

Rejections are hard, but it’s time for you to get back on the horse and start afresh - on a new home loan application, that is. We’ve broken down four steps to follow before making an application, so you’ve got the best chances of getting the green light on your next mortgage application.

1. Don’t re-apply before you’re ready. Lenders reject loan applications because they have genuine reason to believe you’re not fit to service your loan. There’s no use in going to another lender to try again before you’ve made some necessary adjustments to your application. Not to mention, every application will show up on your credit history, which may look unfavourable to potential lenders. When reapplying, only do one application at a time, because applying to several may also seem that you make major purchases with haste rather than with financially responsibility.

Related: How to boost your chances of home loan approval

2. Set up a budget. You’ll need to show a track record of genuine savings, and working out a budget could be just the way to do that. It may seem like a no-brainer, but budgeting is something many people don’t give much thought to. If you prove to the lender that you can budget and live well within your means, you'll chances of approval may increase. Using Mozo’s budget calculator, you can see where your money is going and rework your spending so you can get out of debt, grow your savings and get back on track with your application.

3. Know your borrowing power. If you’re looking to borrow more money than your current financial situation allows, you’re more likely to be rejected. Check out our home loan borrowing calculator to see how much you might be able to borrow based on your income and debt, and make sure you’re shopping for houses within that range. Make sure to not forget about including extra fees that come with property ownership like home insurance, council fees, and utility bills. 

4. Clean up your credit. Before reapplying for your loan, another good strategy is to make sure that your credit report is in top shape. Start online with a free copy of your credit report and correct any mistakes. From there, it’s important you pay off any outstanding debts and keep a close eye on any repayments to avoid late payment fees and keep your credit report scrubbed up.

Lenders tend to look for applicants with higher credit ratings, because it means you'll be less likely to default on your home loan repayments. Low credit ratings are view as a financial risk to any lender, so work on bringing that number up.

Find yourself a great deal

Once you've made sure your finances are in order and you’ve got the best chances at approval you can have, you could be ready to start looking at new loans. Browse our home loan comparison table for an idea of what’s currently available.

Home loan comparisons on Mozo - last updated 17 August 2022

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