What happens if my home loan application gets rejected?

So, you’ve gone through the effort of finding a home loan, collecting all the documents you need, and finally applying for it, only to find out that your application has been rejected. What now? 

Fortunately, an application rejection doesn’t spell the end of your home-buying journey. If a lender is considerate, they’ll explain why your application didn’t satisfy their requirements. If you’ve just received a generic ‘sorry’ email, then you might have to do a bit more work to get your next application over the line. 

So, what can you do to help your chances on your next application? Let’s find out. 

If you’re wondering why your application for a home loan was denied and you want to know how to improve your chances next time, we’ve put together some ideas. 

But, before we get into the reasons your home loan application was not approved, it’s important to understand what lenders are looking for. 

When you submit your application, including all the relevant documents, they’re looking for red flags in your finances and building up a picture of your borrowing power. 

These red flags could include a bad credit history, spending too much, or having outstanding loans or debt, just to name a few. 

Lenders want to see consistency, as the bread and butter of their business is receiving consistent mortgage repayments from you. Anything that throws your ability to service the loan into question contributes to the likelihood of a rejected home loan application. 

If the lender you applied with didn’t explain their reasoning in detail, start by considering the following reasons: 

1. You have a bad credit history

For banks, your credit score indicates how reliable you are as a borrower. If your credit is bad, it’s a big mark against your name and could be the reason your loan application was rejected. 

You might have a bad credit score for any number of reasons, including late or missed payments, court judgements, or if you’ve ever filed for bankruptcy. 

If that sounds at all familiar, you can check your credit score through a credit reporting body, like Equifax, Experian, or illion. 

Note: You may be entitled to check your credit score for free if your home loan was rejected in the past 90 days. 

If it turns out you’ve got bad credit, then it’s time to improve your credit score.  

2. You have a low deposit 

A deposit of less than 20% can give some lenders cold feet, especially if you don’t have evidence of genuine savings.

While there are low deposit home loans available for those with 5-10% home deposits, the more you pay up-front, the better the chances of having your home loan approved are.

This is because lenders are risk-averse. The more money they have to front, the bigger the risk it poses if you can’t repay the mortgage.

Do what you can to increase your home deposit by as much as possible. It might take a little longer to build up your base, but it could get you over the line on your next application. 

Whether it involves moving your cash into a savings account or term deposit, finding an extra lump sum of cash, or adjusting your budget to save more money, having a larger deposit will calm a lender’s nerves.

3. You aren’t making enough money 

If you aren’t making enough money to comfortably repay a home loan each month, then that’s a pretty good reason for a lender to deny your home loan application. 

What do we mean by ‘comfortably’? Lenders add a buffer of about 3% to their advertised interest rate to determine whether your income can cover interest rate hikes. It’s known as a serviceability buffer.

If your income is too low to afford mortgage repayments, you need to find a way to increase it. Increasing your income can be done in a few ways. 

First, negotiate with your current employer to see if there’s a raise on the cards. It helps to cite advertised salaries on job sites for similar positions. 

If you can’t get a raise, you’ve already found a few open positions for similar jobs that may pay you more. Unfortunately, one of the most surefire ways to up your income is to get a new job. 

If taking a new job at a different company isn’t an option, you may consider taking on freelance work in your area of expertise or working a second job in your spare time.

4. You don’t have genuine savings

Lenders want evidence of genuine savings – money you’ve consistently saved up over time. If you’ve been gifted your entire deposit, it won’t tell your lender how financially disciplined you are when they look through your bank statements. 

It’s not the end of the world if you don’t have genuine savings but it helps to show that you’re able to set aside money, regardless of whether it’s for your deposit or for making home loan repayments. After all, a lender wants borrowers who can definitely finance a home loan, not borrowers who can only sort of do it. 

5. You’re self-employed or a freelancer

If you’re self-employed, lenders look at that as an added risk. What if business dries up? What if you get sick and aren’t able to earn an income? 

Lenders’ obsession with consistency can affect self-employed individuals’ chances of home loan approval. But it’s certainly not impossible. 

If you believe your home loan application was rejected on this basis, look into low-doc home loans, which often suit freelancers who mightn’t have the standard documentation required for a regular home loan. 

6. You spend too much 

Lenders go over your bank statements with a fine-toothed comb to work out whether you pose a mortgage default risk. They don’t just look at how you save, but also how you spend. 

If you spend frivolously, that is, you regularly buy unnecessary or expensive things, you’re sure to raise eyebrows in the loan assessment department. 

If you’re living beyond your means by not showing that you’re saving as well, it looks risky from a lender’s perspective.

7. You have too much debt 

Having a credit card, personal loan, or car loan debt hanging over your head, can be a red flag for a lender.

However, recent regulation changes mean lenders look at other kinds of debt besides personal loans and credit cards. How much of your HECS-HELP student loan debt is outstanding? What about Buy Now Pay Later? These can all affect how a lender sees you, since they don’t want a home loan to compete with your other debt obligations. 

Instead, try to consolidate or pay off as much as possible before taking on more debt.

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, but your lender rejected your home loan application?

If you’ve bought through a private treaty, there’s usually a cooling-off period of around five business days during which you can opt 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 risk losing your deposit. This is why having pre-approval is so important – it lets you limit your home buying search to properties you can reasonably afford.

If you've already got a mortgage, refinancing should be a sure thing, right? Unfortunately, that’s not always the case, especially these days when interest rates have shot through the roof.

If your personal circumstances (such as your employment or income) have changed, or banks’ lending criteria has gotten stricter since your first home loan application, you might run into some problems.

When you refinance, you have to qualify for the home loan you're applying for, so if you've taken on more debt, lost income, or even had a kid since your first mortgage, you may have inadvertently become a home loan hostage. 

That goes doubly so if property prices have fallen and the home equity you hold has decreased.

If you have negative equity (that is, your mortgage balance is greater than the current value of your home), lenders might be unwilling to take you on because your debt on your property is worth more than the property itself.

One good tip is to reduce your debt-to-income ratio by paying off any other debts you owe, such as car loans, personal loans, or credit cards. Paying down more of your home loan and reducing your LVR can also boost your approval chances, since the bank is lending you less of your home's overall value.

Rejections are hard, but you can always start afresh on a new home loan application once your circumstances have improved. Here are four steps to follow before re-applying. 

1. Don’t re-apply before you’re ready

Lenders reject loan applications because they have genuine reason to believe you can't service your loan. There’s no use in trying again with a different lender before you’ve made some necessary adjustments to your finances.

What’s more, every mortgage application you make will show up on your credit history as a 'hard enquiry', which may look unfavourable to potential lenders. Too many hard enquiries makes you look desperate for credit, and also suggest you've been rejected multiple times: a major lending red flag. 

2. Set up a budget

You’ll need to show a track record of genuine savings for your next home loan application, and drawing up a budget could be just the way to do that. If you can prove to mortgage lenders that you can live well within your means, your chances of approval may increase.

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. Use a home loan borrowing calculator to see how much you might be able to borrow based on your current income and debts, and make sure to limit your search to properties within that range.

And don’t forget about all the extra costs associated with home ownership like home insurance, council fees, and utility bills. 

4. Clean up your credit

Another good strategy is to make sure that your credit report is in top shape. Start by requesting a free copy of your credit report from one of the three main credit reporting bodies (Equifax, Illion and Experian) and scan it for any mistakes. 

From there, it’s important you pay off any outstanding debts and keep a close eye on any bill payments to avoid late payment fees.

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 viewed as a financial risk to any lender, so work on bringing that number up.

5. 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.