So you’ve finally decided to take the plunge and and purchase your first home, but you’ve hit a bump in the road when your home loan application was declined. What now?
A denied home loan application doesn’t have to mean the end of your journey, which is why we’ve broken down the why’s and what next to do’s- so you can get your home loan application back on track.
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 bad credit history. Home loan providers use credit history 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 have less than 20% of the property price as a deposit this may pose a problem if it means there’s not enough 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.
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 rejects 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. 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.
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 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.
Rejections are hard, but it’s time for your 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.
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 Australians aren’t giving much thought to. In fact, 19% of Aussies haven’t got any sort of budget in place. 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. Champagne tastes on a beer budget can set you off on the wrong foot when it comes to buying a house. If you’re wanting to borrow far too much money for your current financial situation, 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 financial liabilities, and make sure you’re shopping for houses within your budget.
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.
Once you’ve taken 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. With over 500 home loans from more than 80 different providers, the Mozo home loan comparison tables makes it easy for you to find the right low interest home loan for you.Home loan tips