Being rejected never feels good – and this of course, extends to being rejected for a home loan; which most likely hurts the most, given the fact that you’ve finally got a reasonable amount of savings and a dream property in mind.
Firstly, it’s important to remember that each bank has their own set of lending criteria they need to use when assessing a potential loan application.
We’ve compiled several reasons that may have led to your home loan being rejected:
1. You don’t have enough of a deposit
The primary reason for a home loan application being declined, most banks would prefer it if you had a 15%-20% deposit (or more!) on a potential property to limit their exposure to risk. This doesn’t have to be all in savings though; there are a number of First Home Owners Grants you could be eligible to apply for.
2. You’re underestimating your ability to pay
Under Australian Law, banks have a responsibility to ensure you have the capacity to service your loan. It’s not so much about physically being able to meet your repayments by promising to cut down on things, but more so about how having a mortgage will fit into your lifestyle.
Does your income after tax support not only your mortgage, but also, your groceries, bills, entertainment costs and more? Sure, you may have enough saved for the first few months, but what happens after?
If the bank can’t see you meeting your loan requirements for an extended period of time (think 20+ years), you may find yourself being rejected for a home loan.
3. You can’t show proof of savings
This is especially important to the banks when taking out a home loan application. If you’re unable to provide a genuine record of savings that shows consistent contributions over at least three months, your chances of approval can be affected. This also ties into having proof of a reliable and stable income.
4. The property isn’t suitable
On the off chance that you default on your loan, the bank may sell your property in order to recover the debt. If they’re unable to make a profit – or at the very least, obtain back what they loaned - because of the type of property, this could be the reason why your home loan application has been rejected.
Further to this, some banks won’t provide loans for studio apartments less than 50 square metres in size and may choose not to offer loans in new high-rise developments if they’ve already provided several loans in the same building (in order to minimise their risk exposure).
5. Your credit history is poor
If you’ve got more than a few late payments on your credit card, unpaid bills or even, defaulted on a personal loan, this can limit your chances of approval. Your finances are always documented, so it’s a good idea to get a credit report prior to a home loan application and take the steps needed to improve.
6. You have too much debt
When you apply for a home loan, you’ll need to list details of any debt tied to your name. If the bank finds that once they take out your debt repayments, your lifestyle costs and non-negotiable costs (i.e. bills and groceries), and there’s not a lot left for a mortgage, you can be rejected.
7. You can’t provide the necessary documentation
When you apply for a home loan, banks often request a substantial amount of documentation. Be prepared to provide bank statements, employment details, contact information, property specs and more, in a timely fashion.
Let’s hope your next home loan application goes more smoothly with our rejection reasons in mind. Once you’ve finally organised your loan and your chosen property, don’t forget to consider our Loan Protection Plan in order to protect your ability to meet your monthly payment commitments, in cases of involuntary unemployment, serious illness/injury or even, death.
Loan Protection Plan is jointly issued by Hannover Life Re of Australasia Ltd ABN 37 062 395 484 (Death, Terminal Illness, Living and Accidental Injury Benefits) and QBE Insurance (Australia) Limited ABN 78 003 191 035 AFSL 239545 (Involuntary Unemployment Benefit). It is distributed by Australian Life Insurance Distribution Pty Ltd ABN 31 103 157 811 AFSG 226403 (ALI). ALI receives commission for each policy sold. Any advice provided is of a general nature only and does not take into consideration your personal objectives, financial situation or needs. You should consider the Product Disclosure Statement when deciding if this product is appropriate for you.