What To Do If Your Home Loan Is Denied?

A home loan rejection can feel deeply disappointing, especially when you have been imagining yourself holding the keys to your new home.

But a declined application does not mean your journey is over. Once you understand why it was declined, you can take the right steps to strengthen your position and apply to a lender better suited to your circumstances.

Our mortgage brokers have helped countless borrowers move from rejection to approval, and we can help you, too.

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.

4. Age

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 Do I Improve My Chances Of Approval After My Mortgage Application Is Denied?

If your mortgage application has been denied, there are steps you can take before applying again:

• Review where your money is going and cut back on unnecessary spending. A clear budget can help you show lenders that you are living within your means and building a regular savings habit.
• Use a borrowing power calculator to estimate how much you may be able to borrow based on your income, expenses and debts. This can help you set a realistic property budget or decide whether you need to save a larger deposit.
• Get a free copy of your credit report and check it for errors. Make any overdue payments, avoid missing repayments, and consider setting up direct debits so bills and debts are paid on time.
• Avoid changing jobs just before applying for a home loan, where possible. Many lenders prefer to see that you have been in your role for at least six months, although some lenders may still consider you if you have recently started a new job or are self-employed.
• Different lenders have different policies. Some may accept gifted deposits, while others may offer guarantor home loans or low-deposit options if you do not have a large deposit saved.
• Some lenders have restrictions based on the property type, location or postcode. Check whether the property is acceptable to lenders, and consider getting a property and suburb report to avoid overpaying.
• A pre-approval can help you understand your borrowing limit before making an offer or bidding at auction. Avoid applying for pre-approval with multiple lenders, as each application may appear on your credit file.

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Start With The Right Strategy

At Home Loan Experts, we can review your situation, explain your options, and help you avoid making the same mistake twice. Instead of guessing where to apply next, you can speak with a mortgage broker who understands how different lenders assess applications.

Call us on 1300 889 743 or complete the free online assessment form today to speak with a mortgage broker.