Top reasons why lenders decline home loan applications
Applying for a home loan requires a lot of preparation. It is often a time-consuming process, requiring a great deal of paperwork. However, even after putting in so much of your time to carefully compile your home loan application, it can get declined, leaving you disappointed and confused. Thankfully, it’s possible to increase your chances of mortgage approval by understanding the common reasons for rejection and avoiding them while preparing your mortgage application.
6 reasons why loans are rejected by lenders
- Lack of genuine savings
Some lenders require proof of genuine savings before approving your home loan application. Genuine savings refers to the money you have saved from your income over time (at least three months). To verify your savings, a lender will generally ask you for your last three months bank statements. The purpose of the genuine savings requirement is to confirm how you saved your deposit and whether you’re disciplined enough to continue meeting your repayments once your mortgage is approved.
If you can’t provide this proof, it may affect your chances of approval. So, even if you are planning to use a gifted deposit, consider saving some money regularly for a few months before applying for a home loan to fulfil the genuine savings requirement.
- A poor credit rating
Applying for a home loan with a poor credit score is risky. When you apply for a mortgage, the lender wants to see that you have a good history of paying your debts on time. Therefore, a tardy repayment history is likely to jump out and reduce your chances of mortgage approval.
However, having bad credit on your file isn’t the only reason your mortgage application may get derailed. Shopping around for a loan can also bring down your credit rating.
Whenever you apply for a loan, the lender will access your credit report to check your creditworthiness. This is known as a hard enquiry, and it is recorded on your file. Too many credit applications in a short span would therefore result in multiple enquiries on your file – which could lead a lender to believe that you’re going through a financial crisis and need a loan desperately.
To avoid rejection due to a poor credit rating, make it a point to pay all your bills on time. It’s also a good idea to compare home loans online or work with a broker to find the best possible deal before making a formal loan application.
- Poor spending habits
One of the reasons behind a relatively high mortgage rejection rate is increased scrutiny into borrowers’ expenses in recent times. As lenders are bound by the responsible lending criteria, it falls upon them to ensure you’re not advanced a loan that you cannot afford. Therefore, lenders may sometimes request you for bank statements for up to 12 months to see how you spend your money and where you spend it. If they spot any unusual spending habits, it could raise a red flag and lead to rejection. For instance, spending thousands of dollars on gambling, or even eating out or shopping could trigger concern.
- Missing information
Lenders have access to your bank statements to assess your spending habits. Lying about your expenses or omitting the mention of a credit card or childcare expenses could lead to rejection based on non-disclosure.
It’s always best to be completely honest about your financial situation with the lender. Even though you might criticise lenders for the harsh scrutiny before approving a mortgage application, it is actually for your own good.
Borrowing more than what you can reasonably afford can lead to mortgage stress, especially if the interest rates rise in the near future. Sharing the complete truth about your income and expenses can help a lender assess your repayment capacity better and advance you a loan accordingly to avoid mortgage stress in the future.
- Missing documentation
The home loan application process can sometimes get tedious. The sheer number of documents required to support your application may seem daunting, but failure to provide all the necessary details in a timely fashion could lead to rejection. A mortgage broker can help reduce your stress by preparing your mortgage application with you and ensuring that no important information or document is missed out.
- Unsuitable property
Before you start house hunting, it’s worth knowing that some lenders do not accept specific types of properties as security owing to the increased level of risk they might pose. For instance, a lender may not approve a home loan for a property in a regional area or an area that’s prone to excessive flooding.
Generally, each lender has different classifications for the type of properties they will accept. This classification is based on factors like location, size, neighbourhood and the condition of the property. Conducting some market research to avoid buying high-risk properties can reduce your chances of rejection.
You can also check the worth of comparable properties in the neighbourhood to ensure you’re not paying more than the property’s value. Most lenders will get an independent valuation done for the house when you apply for a mortgage. If they find that it is not worth what you are paying for it, they may reject your home loan application.
Knowledge is Power
Now that you know why lenders may reject a home loan application, you can be extra careful while applying for a mortgage to increase your chances of approval. These tips will also help you in case your home loan application has been already rejected. Instead of immediately applying for another home loan, try to analyse why your application got rejected in the first place. Going to another lender without fixing your financial situation will only lead to more rejections, which will adversely affect your credit score. If you’re confused about what went wrong, discussing your situation with a mortgage broker could help.
