Why do home loans get rejected?

Why do home loans get rejected?

Having a home loan rejected can be incredibly frustrating, especially if you’ve put a lot of time and effort into your application. While different banks use different criteria to assess home loan applications, there are a few common issues that could see your mortgage application rejected:

Poor credit history

If you’ve had money troubles in the past, such as payment defaults, bankruptcy, or even just unpaid bills, a bank may decide that providing you with a home loan is too risky.

While Comprehensive Credit Reporting (CCR) means that positive credit events, such as paying off credit cards and clearing debts, may help improve your credit history, keep in mind that the negative events can stay in your credit file from two to seven years, depending on their severity.

Not enough deposit

Many lenders ask for an up-front deposit of at least 20% of the property’s value, also known as a Loan to Value Ratio (LVR) of 80% or lower.

While some are willing to accept smaller deposits of 10% or even 5%, the less money you can provide as security up front, the less likely your application is to be approved.

It’s also important to keep in mind that even if your 5% or 10% deposit home loan is approved, lenders often require borrowers with deposits smaller than 20% to pay for Lender’s Mortgage Insurance (LMI) to cover the lender’s risk, which can be an expensive additional charge.

Paying too much for an overpriced property

Lenders often plan for the worst-case scenario when assessing home loan applications, calculating whether or not they’d recover their money by selling your property if you were to default on your mortgage repayments.

Because of this, many lenders require a property valuation as part of a home loan application. If it turns out the property is worth much less than the amount you’re asking to borrow, they’re likely to reject your application rather than risk ending up out of pocket if forced to sell.

Loan to income ratio and income stability

When assessing home loan applications, lenders often calculate the mortgage payments and compare them to the borrower’s income. If the repayments would eat up a high percentage of the borrower’s income, they may reject the application rather than put the borrower into mortgage stress.

It’s not just the size of your income either, but the stability. Borrowers who can show they’ve been consistently receiving a salary from their employer for at least two years may be more likely to have their home loans approved. Contractors, casuals, and others with less stable incomes may have a more difficult time, and may need to apply for a low doc loan or go through a specialty lender.

No demonstrated savings

Borrowers who struggle to save the 20% deposit required by many lenders may turn to other sources for the money, such as selling major assets, or accepting generous gifts from relatives and friends. However, simply having a deposit available isn’t always enough for some lenders, who would prefer you demonstrate your financial responsibility by proving you’ve saved this money.

Using a savings account to grow a percentage of your deposit wealth over time can be helpful. Even if you’re gifted with your deposit funds, leaving this money to sit in your savings account for a few months can sometimes help show that you’re responsible enough to save your money, rather than spend it.

Too many debts

If you already owe a significant sum of money to creditors, other lenders may be less willing to risk lending you more money, as they may be concerned that you won’t be able to pay them back.

Consider repaying outstanding personal loans, car loans and credit cards before applying for a home loan. If you have multiple credit cards or lines of credit, it can sometimes be worth cancelling what you don’t need and/or use, as some lenders will assess your ability to repay a home loan under the assumption that you’ll have maxed out your credit cards.  

Too many applications

Each time you apply for any type of credit, from home loans to car loans to credit cards, a record will be kept on your credit history, whether it is approved or not. Making too many loan applications over a short period of time can raise red flags for some lenders, especially if these applications were rejected, as this could indicate a risky borrower.

Rather than sending off applications for every home loan you’re interested in, consider sending just one application to the lender you’re the most confident of being approved by. If it turns out you are rejected, find out why, and take some time to get your finances in order before making your next application.

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Learn more about home loans

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

What is a valuation and valuation fee?

A valuation is an assessment of what your home is worth, calculated by a professional valuer. A valuation report is typically required whenever a property is bought, sold or refinanced. The valuation fee is paid to cover the cost of preparing a valuation report.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What is a building in course of erection loan?

Also known as a construction home loan, a building in course of erection (BICOE) loan loan allows you to draw down funds as a building project advances in order to pay the builders. This option is available on selected variable rate loans.

How is the flexibility score calculated?

Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

What is the ratings scale?

The ratings are between 0 and 5, shown to one decimal point, with 5.0 as the best. The ratings should be used as an easy guide rather than the only thing you consider. For example, a product with a rating of 4.7 may or may not be better suited to your needs than one with a rating of 4.5, but both are probably much better than one with a rating of 1.2.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

Mortgage Calculator, Interest Rate

The percentage of the loan amount you will be charged by your lender to borrow.