A major part of the home buying process is getting a suitable and competitive home loan. Unfortunately, a large percentage of home loan applications are often rejected for avoidable reasons.
For instance, unusually high living expenses or providing incorrect documentation may cause your mortgage application to be rejected but can be avoided in some cases.
Understanding what may cause your home loan application’s rejection and how to avoid these things can significantly improve your home loan approval chances. Here’s a list of ways you can help get your mortgage application over the line.
- Keep your expenses in check
In recent times, lenders have introduced additional changes to the home loan application process, including closer scrutiny of borrowers’ income and expenses to determine their ability to repay the loan.
Many lenders are scrutinising borrowers’ expenses to meet the responsible lending guidelines set by the government. Therefore, it might be a good idea to watch where your money is going and spend responsibly to help demonstrate to a lender good financial behaviour. Besides following a strict budget, keep an eye out for recurring expenses like gym memberships and buy now pay later services that silently add to your monthly expenses.
Building a savings habit will further increase your chances of getting your mortgage application approved. When you take control of your spending, you may find some extra money in your budget. You can put aside these extra dollars to build your deposit amount faster. It will also illustrate to a lender you can manage your money.
Simple changes like swapping bought lunches with packed, home-cooked meals, skipping cafe bought coffee and rounding up your purchases can go a long way in boosting your savings.
- Keep your credit score in check
Your credit score is a number used by lenders to gauge how well you’ve been able to manage your finances. If you’ve been making all your repayments on time or keep your credit products to a minimum, you’re likely to have a high credit score.
On the other hand, if you’ve missed or delayed payments, they can stay on your file for a long time, bringing your credit score down. Lenders equate a low credit score with being a high-risk borrower. They often don’t approve home loan applications from borrowers whose credit score is below a specific threshold. Therefore, it’s usually a good idea to check your credit score online before applying for a home loan.
Regularly checking your credit report can also help you in getting approved for a home loan faster. By reviewing your credit report before applying for a home loan, you’ll know what’s in it before a lender sees it. This will give you time to correct any errors, such as disputing incorrect listings or working to improve your report and credit score before a lender sees it. This will in turn improve your chance of getting home loan approval.
- Work out how much you can borrow
It’s helpful to get a fair estimate of how much you can borrow or borrowing capacity before applying for a mortgage. Your borrowing capacity is the amount a lender will lend to you to purchase a property. While lenders may have different processes to calculate this amount, there are some common factors that determine your borrowing capacity. These include your income, expenses, number of dependents, and ongoing debts.
You can use a borrowing capacity calculator to get an estimate of the amount you might be able to borrow. This will help you narrow down your property search and help avoid your mortgage application’s possible rejection.
- Reduce your debts
Lenders look at something called your debt-to-income ratio (DTI) while assessing your home loan application. Your debt-to-income ratio compares the amount of money you earn to the amount of money you owe in existing debt. A DTI that is over six times your income is considered risky by many lenders.
It may cause them to reject your home loan application or offer you a higher interest rate than borrowers with a low DTI. On the other hand, if you have a lower debt to income ratio, lenders may view this positively, increasing your chances of home loan approval.
This shows that you have a better chance of getting your home loan application approved by keeping your debts in check. To do this, you need to make sure you don’t take on too many loans and keep your credit limit on any credit cards to a minimum or even pay off the cards.
For example, suppose you have two credit cards with a limit of $3,000 each. In this case, many lenders will assume you have a debt of $6,000, irrespective of whether you use your cards or make your repayments regularly. So lowering the credit limit on the cards or getting rid of them would make you a more attractive potential borrower.
You should also be upfront and disclose all the information about any and all your credit cards and other debts while applying for a home loan. Mortgage applications often get declined for non-disclosure of information, and you can avoid rejection for this reason by being honest about your finances.
- Avoid any career changes
Having a stable job and income can help you in getting your home loan application approved. Many lenders are reluctant to lend to people who’ve worked for less than six months. Additionally, some lenders require you to be in your current position for at least six months or a year before approving your mortgage application.
If you’re planning on applying for a home loan, it’s better to avoid any job changes unless necessary or inevitable. If you have to switch jobs, you may want to discuss your situation with a mortgage broker. A broker can help you with home loan deals from lenders more likely to understand your situation and offer expert advice. They can also give you a better understanding of your finances in terms of lenders’ requirements for mortgage approval. This will help you filter your choices and increase the chances of getting approved for a home loan.