Navigating a home loan application can often be a long and complicated process. Often times after the stressful and trying hours you have spent, you can still be rejected.
A survey conducted by Digital Finance Analytics found that around 40% of home loans were rejected in December 2018.
A mortgage is a long-term commitment and a significant financial investment. For this reason, lenders should be careful who they lend to. In addition, you also need to make sure that the mortgage is right for you. There is nothing more stressful than ending up with a home loan that you can’t easily maintain or pay off.
With this in mind, Joseph Daoud from It’s simple explains that there are a few common reasons why your home loan application may be turned down and tips on how to avoid them.
“Being aware of these reasons early on in your application can save the energy, time and headache of having to resubmit or re-apply for a home loan, ”explains Joseph.
The quick guide below describes the 5 most common reasons your mortgage won’t be approved and what you can do to avoid them.
- Misunderstanding of the concept of “service”
Service is the concept of a person’s ability to repay the loan. The common misconception is that it’s as simple as incoming income vs. outgoing income. But maintenance also includes what is called “buffering”.
Buffering includes a valuing your home loan at a higher interest rate, to ensure that you are able to meet repayments when interest rates eventually rise.
“Because of this extra step, it’s always good to talk to a bank or broker. This way, they can calculate your service and your maximum borrowing capacity. Plus, things like your income, open credit facilities, and any education-related debt can also affect your maximum borrowing capacity, ”explains Joseph.
Many people get a down payment or an inheritance and think it’s enough to buy a property without talking to a bank or broker. In reality, this is usually not the case.
- Bad credit history
Unfortunately, the mistakes of our past can come back to haunt us if we are not careful. The laws and regulations to be able to open a ZipPay or Afterpay account, or just open a credit card are much more flexible than those for a home loan, and being able to open such accounts at an early age, without understanding the implications may have. a damaging effect on your credit history.
These are all forms of credit and if you default now it may affect our mortgage application in the future.
“If you plan to apply for a home loan at some point, it’s important to know your credit history.
“Be careful with your credit card debt, personal loans, or after-payment accounts. Keeping your file perfectly clean now will pay off when you apply for a home loan in the future.
- Not having enough money for the deposit
Your home loan can be refused if you fail to meet the lender’s minimum deposit requirement. Each property will have a defined loan-to-value (LVR) ratio that states how much you can borrow against the total mortgage amount.
Many financial lenders have entered the business of offering 5% deposits so that they can exchange a contract and secure it. However, real estate agents are not governed by the same as those in the field of finance. Therefore, a real estate agent will not consider the implications of the lender’s mortgage insurance, the buyer’s potential service, or the impact that a 5% deposit will have on their interest rates. This may result in the rejection of a request.
“If you work with a mortgage broker, they will be able to calculate the properties for which you are eligible. This will save you the complicated process of finding out on your own. Or the disappointment of being turned down for a home loan application with an LVR that you can’t meet, ”explains Joseph.
- Your job type
Unfortunately, the type of job you have may result in your application being rejected. The most common situation for which this occurs is that of people with casual employment.
“Some banks will calculate 48 weeks of casual income per year as the average hours worked method, while other banks will base it on the full 52 weeks. If you are a casual employee, it is always best to talk to several lenders to find a solution for you.
- Apply to the wrong lender
This is a common mistake candidates make without realizing it. Going to the wrong lender, you may just not be suitable for their needs.
“Each lender has their own risk profile with respect to: type of job, acceptable LVR, income assessment and amortization rate for interest rates, ”explains Joseph.
You might end up being rejected by many borrowers just because you haven’t researched their conditions and requirements enough. To overcome this, Joey recommends spending time and energy on your research or working with a professional broker.
Home loan applications can be complicated, and there’s a good reason for it. Mortgages are a long term commitment and involve a large amount of money. Researching your chosen lender thoroughly or working with a professional broker can save you time, money, and the disappointment of being rejected.