When your home loan application is rejected, it may seem like you’re never going to get the keys to your dream home.
However, instead of taking a step back, this is your opportunity to find out why your application was denied. You can work on the issues so that your application is accepted when you apply again.
What Happens If My Mortgage Application Gets Rejected?
Every time you apply for a home loan, you create a hard inquiry on your credit file. So when your loan application is denied, it remains as an inquiry on your credit file.
While one denied home loan application would not drastically lower your credit score, it’s a different story when you apply with one lender after the other.
The more inquiries on your credit file, the lower your credit score. Also, a large number of inquiries in a short time suggests to potential lenders that you’re a risky borrower. This further decreases your chances of approval.
Therefore, it’s important to apply only with a lender that is favourable to your circumstances and is likely to approve your application.
Since choosing the right bank for a home loan is difficult, take the help of a mortgage broker. At Home Loan Experts, we tailor your application so your home loan is approved. Call us on 1300 889 743 or enquire online.
What You Should Not Do After Your Application Is Denied
- Reapply again with more lenders. Every application is recorded on your credit file. Applying with several lenders is a red flag that you’re not financially stable.
- Lie on your mortgage application as it would only make matters worse. Lenders will thoroughly assess your application to make sure every statement checks out.
- Apply with dodgy lenders and get finance, as these lenders are not monitored by regulatory bodies and charge exorbitant interest rates.
The first step to applying with the right lender is to find out why your application was rejected. The next section explores reasons why your home loan application may have been denied.
What Are The Common Reasons A Mortgage Application Is Denied?
1. Small Deposit
In most cases, a deposit of at least 5% to 10% of the property value is required to get approved for a home loan. Each lender has its limits on the maximum amount you can borrow. If your deposit is less than 5%, then your application could be rejected.
2. Bad Credit History And Defaults
The amount you can borrow depends on the age, the total number and total dollar value of the defaults. If you have a thin credit history or your credit file includes missed payments and defaults, it’s not a good signal to lenders.
3. Employment Situation
If you are unemployed, there are no lenders who can help. In fact, things get tricky if you’ve been in your job for less than six months or you’ve been self-employed for less than two years.
Most lenders do not lend to borrowers under 18 years of age. At the other end of the spectrum, being too old is not favoured unless the borrower has a solid exit strategy.
5. Property Issues
Banks are wary of financing properties located in particular locations or environments. These include properties in inner-city apartments, off-the-plan, properties with transmission lines over them or areas that are affected by bushfires and floods. Also, if the property is overpriced, then the lender could reject your application.
6. Bad Spending Habits
The bank will look at your transaction history and will consider whether you can afford the mortgage repayments. Even inquiries on buy-now, pay-later services are scrutinised.
7. Applying With Multiple Lenders
Too many inquiries on your credit file can make it tough to get a home loan, especially if you’ve had two or more inquiries in the last six months.
8. No Genuine Savings
Genuine savings show that you saved a certain amount over time towards a deposit for your home. Lump-sum deposits like inheritance or gifted deposits, and irregular bonuses, are not considered genuine savings, as the lender cannot gauge your savings habits from them.
9. Inadequate Income
Lenders need to know that you can afford the mortgage repayments without any financial hardships. They will do a serviceability test to find out your debt-to-income (DTI) ratio. This helps them ensure you can pay off your existing debts on top of a mortgage and have money left over. If there would be little to no money left over, then your ability to pay back the loan is questioned.
10. Insufficient Documents
Lenders will request documents that show information about your employment, financial situation and contact details. If any one of these documents is missing or has the wrong information, the application is rejected.
How Long Should You Wait To Apply For A Home Loan After Being Denied?
There is no definite timeframe as to how long you should wait to reapply for a home loan. You have to know the reasons why your application was rejected and take the required time to fix the issues.
To ensure the highest chance of approval, it’s best to wait for at least a year as lenders will look at applications made in the last 3 to 6 months.
Can A Home Loan Be Declined After Pre-approval?
Yes, your application can be declined even after pre-approval in the following situations:
- You recently changed your job, as lenders will question your job security.
- You took out more credit after pre-approval, which increases your debt and DTI ratio.
- There were some missed and late payments on your credit file after pre-approval.
- There are mistakes and inconsistencies with your application.
- The lender found out information during pre-approval that was not previously disclosed.
- The property you want to buy does not meet the lending criteria.
- The lender’s requirements changed during your pre-approval period, and you don’t meet the new requirements.
If your application was denied even after it was pre-approved, ask your lender why and try to fix the issues.
Can Your Loan Be Declined After Unconditional Approval?
Yes, it can. But the situation is very rare.
When you receive a letter from your lender offering unconditional approval, a clause states “subject to further bank requirements”. So, your home loan application can be denied, especially if there are drastic changes to your financial circumstances during the application process.
Another way your home loan can be declined after unconditional approval is when the Lenders Mortgage Insurance provider rejects your application.
What If I Already Bought A Home And Was Denied?
If you bought a home through a private treaty, there is a cooling-off period between 3 and 5 days where you can opt out of the contract if your home loan was not approved.
There is a ‘subject to finance clause‘ included in the contract of sale that tells the seller you legally agree to purchase the property on the condition that you get formal approval from your bank. This protects you from losing your deposit or being sued by the seller. There are slight differences in the clause from state to state.
Unfortunately, if you bought a property at auction, there is no cooling-off period. If the home loan application is not approved, you risk breaking the contract and losing your deposit. That’s why a buyer should do a reliable pre-approval before bidding at auctions.
How To Improve Chances Of Approval After Mortgage Application Is Denied
1. Set Up A Budget
Find out where you’re spending and remove unnecessary expenditure. Create and implement a budget to show the lender you’re living within your means. Sticking to your budget helps create a regular savings habit, so you demonstrate financial discipline to the lender.
2. Know Your Borrowing Power
Use our borrowing power calculator to determine how much you can borrow based on your income and debt. This helps you be realistic about how much you can afford. If you want a higher-priced property, you can keep saving towards a deposit.
3. Clean Up Credit
Get a free credit report and make sure it is error-free. Try to make any late or missed payments. Keep a close eye on repayments to avoid late payments. Break the habit of missing payments by setting up a direct debit, so your debts are paid every time your salary is deposited.
4. Maintain A Stable Job
Do not change jobs in the lead-up to submitting the application. Try to stay on your job for six months or longer. Fortunately, we know lenders who can accept applications if you’ve started a new job or are self-employed.
5. Apply For The Right Home Loan
Lenders offer different home loan products to accommodate the needs of borrowers. If you don’t have genuine savings, some lenders accept gifted deposits. If you can’t save a large deposit, you can apply for a guarantor home loan or other low-deposit home loan options.
6. Buy The Right Property
Use the postcode calculator to see if there are any restrictions. Off-the-plan properties are not a safe bet for first home buyers. Get a reliable property and suburb report, so you’re not overpaying.
7. Get Pre-Approved
If you want to be extra careful, get pre-approved for a home loan the next time you apply. A pre-approval lets you know the maximum you can borrow so you can bid at auctions and negotiate with more certainty. Do not get pre-approvals from multiple lenders, as they will show up on your credit file.
When Can I Apply Again?
Once you know how you can improve your chances of a home loan approval, you might be wondering when’s the right time to reapply?
The best time to apply depends on the issues the lender mentioned that caused the rejection. For example, if the reason was a high DTI, it would take time for you to pay off your debts to lower the DTI ratio. Once your DTI ratio is lowered, you can apply again.
However, it could just be a case of finding the right lender.
You can increase your chances of approval by taking the help of a mortgage broker. At Home Loan Experts, we have a wide range of lenders on our panel. Our mortgage brokers know that what is a roadblock for one lender may be accepted by another. We understand your financial situation and will recommend lenders that are suited to your needs. Call us on 1300 889 743 or enquire online today to take a step towards getting approved for a home loan.