It’s frustrating to have your home loan application rejected, but that doesn’t mean you cannot qualify for a home loan again. However, instead of applying again immediately, it’s advisable to find out why your application was rejected and work on that area to improve your chances of qualifying the next time you apply.
Why was my home loan application declined?
It’s important to understand why your home loan application was declined to avoid making the same mistakes repeatedly. Here are some common mistakes that can get your mortgage application rejected:
1. Providing incorrect information
Most lenders will carry out in-depth income and identity checks before approving your home loan application. That’s why it’s essential to double-check your mortgage application to avoid making silly errors that could lead to rejection. It’s also important that you don’t withhold any information regarding your expenses when applying for a home loan.
Lenders will generally check your expenses and savings habits by going through your bank statements. They will also go through your credit report that lists all your credit cards and loans. Forgetting to mention an active credit card or hiding information about any loans you have taken out could raise a red flag for lenders. So make sure you fill out your application correctly and provide all the documents requested by the lender to ensure your home loan is not rejected for something as trivial as missing documents or information.
2. Inadequate income
Lenders want to confirm whether you’ll be able to meet the minimum monthly home loan repayments comfortably before approving your application. They will assess your income, expenses, future mortgage repayments and other ongoing debts to find out whether you’ll have any money left for your day-to-day expenses after paying for your mortgage.
If a lender feels you won’t have enough money left for necessities, they may not approve your application. That’s why it’s important to calculate your borrowing capacity before applying for a loan to get a realistic estimate of how much a lender might be willing to lend you based on your income and ongoing liabilities.
3. Poor credit score
Another common reason for home loan rejection is a poor credit score. Your credit score is a reflection of your creditworthiness. A high credit score signifies responsible financial behaviour. Therefore, lenders consider you less likely to default on a loan if you apply with a high credit score. On the other hand, a low credit score means you have had trouble managing your money, making lenders wary of loaning you money.
4. Insufficient deposit
Lenders typically require you to provide a 20% deposit or pay for Lenders Mortgage Insurance (LMI) if you apply with a low deposit. However, you’ll still need a minimum 5% deposit in most cases, even if you agree to pay for LMI to qualify for a home loan. You’ll generally also need to show some genuine savings, which refers to money saved from your income over time. If you don’t have an adequate deposit and no genuine savings, you might find it difficult to qualify for a home loan unless you have a guarantor to cover your deposit.
What to do if my home loan application is rejected
Applying for another home loan right after your application is rejected could harm your credit score, especially when you apply to multiple lenders in a short period. Therefore, it’s better to find out why your application was denied to improve on that area before applying again. For instance, most lenders require you to have a minimum credit score to be eligible for a home loan. If you continue applying to multiple lenders despite a low credit score, it can lead to a string of rejections that are likely to harm your credit. Instead, you should work on improving your credit score and reapply once your score is in the acceptable range to increase your chances of approval. Alternatively, you may want to find out about bad credit home loans if you think you can service a mortgage, but your past financial mistakes are keeping you from getting approved for one.
If you aren’t sure why your home loan was rejected or what you can do to improve your chances of approval, you may want to connect with a mortgage broker to understand your situation better. If your mortgage application was declined, but you already purchased a property through a private treaty or an auction, you might need to cancel the sale (which is why it’s important to have a cooling-off period built into your sale contract) or find another loan during the settlement period. As each lender has slightly different criteria for home loan eligibility, it’s possible to find a lender who might approve you for a loan even if another lender rejected your mortgage application. A mortgage broker can help you find the right lender for your situation and even assist you in preparing and lodging your home loan application to save time and avoid careless mistakes.
