Today’s tighter lending criteria means the chance of borrower rejection is higher now than it has been for a long time.
Last year, banks made a number of changes in response to growing credit quality risks, leaving many Australians facing a tougher hurdle to get onto the property ladder, or even to refinance an existing loan.
Banks are now requesting more proof of income, are withdrawing lenders mortgage insurance waivers and are even denying loans altogether to workers who are considered to work in vulnerable industries.
Self-employed applicants and those who are employed on a casual or contract basis are also likely to find it much more difficult to secure a loan or get approved for the amount they want.
But the good news is, if you know the reasons why the banks might blindside you with a “No” response to your application, you can take proactive steps to make this less likely to occur.
Here are the 10 most common reasons why lenders might reject your home loan application:
- Your deposit is too small
It’s virtually impossible to get a loan without at least 10% demonstrated savings, whereas only a few years back you could quite easily borrow 90-95% with some loan products.
And you can’t just ask your wealthy relative or friend to give you a cash gift either.
These days lenders not only want you to save that 10-20% for a deposit, but they also want to see that you’ve built genuine savings rather than been given a one-off lump sum.
A lack of genuine savings might lead the lender to believe you lack financial discipline.
Additionally, some banks will ask that you come up with more capital than what you initially offered when you apply.
- You have a questionable credit history
It might seem obvious to point out that if you have glitches on your credit file, rejection from lenders is pretty much guaranteed.
Any defaults, such as unpaid utility bills, or tardy payments to creditors, will all see you black balled by the banks.
Unfortunately, what many people don’t realise is shopping around for finance can also damage your credit history.
You see, whenever you apply for a loan, whether it’s approved or not, this is recorded on the credit file that the banks will access when you go for a home loan or property investment loan.
And it’ll raise questions.
To avoid rejection due to a question mark over your credit file, there are 4 steps you can take.
- Meet all your financial obligations on time, every time, to avoid bad credit history
- If you have a dispute with a credit provider, try to resolve it as quickly as possible
- Use a finance broker to shop around for the best deal for finance
- Stay ahead of the banks - check your credit history report before they do.
- You’re too young, or too old
If you’re under 18 you don’t qualify for a home loan.
Likewise, applying for a home loan if you’re aged 18-23 is deemed risky and could even bring down your credit score if you have a limited or non-existent credit history.
Meanwhile, although under the Age Discrimination Act, banks can’t discriminate against home loan applications, they may ask for your exit strategy if you’re over 45 years of age.
Failure to do this could see your application knocked back.
- You haven’t been employed long enough
If you’ve been in your job for less than 6 months or have been self-employed for less than 2 years, you’ll struggle to get a home loan application approved.
Most lenders require that you’ve been in your current job for a minimum of 6 to 12 months in order to borrow 80% of the property value.
Likewise, in most cases, you’ll need to have been self-employed for at least two to three years before the banks will approve your loan.
- The lender doesn’t like the property you want to buy or refinance
Unique properties can be fun to live in but when it comes to lenders, they only care about marketability and how saleable a property is.
If a buyer defaults on a mortgage, the lender will need to sell it to recoup costs, so they’re usually adverse to any type of property which they think will make that process difficult.
From unique or bizarre homes, properties in risk areas such as flood or fire zones, or even some in restricted postcodes where there is oversupply, the type of property can determine whether or not you can get finance approved.
- The property is deemed to be worth less than you’re paying for it
When you apply for a loan against a property, the lender will send out a valuer to assess how much that property is worth.
This is so they know that if the need arises for them to sell the security, they can get their money back.
Currently valuers are being very conservative, so don’t be surprised if the valuer tells the bank that he thinks the property you’re buying is worth $490,000 even though you’ve signed a contract at a sales price of $500,000.
- You’ve failed to disclose everything on your application
One of the most damning reasons for rejections from home loan lenders is non-disclosure or fraud.
Whether you’ve genuinely forgotten to include all the documents, or deliberately withheld all the information, failure to disclose information can be viewed as fraud and can be noted on your credit file.
Lenders want to know they can trust you as a client so attempting to start the relationship with lies will only see your application go one way - denied.
Make sure you have everything in order to present to the banks and answer all of their queries as truthfully as possible.
- You want to borrow too much
Although borrowing 90-95% of the property value used to be fairly common, it’s seen as a high risk by most banks.
To get your loan approved, it helps if you have an expert mortgage broker, like those that we work with at Metropole, who knows how to present your case to the lender.
- Your spending habits are poor
When assessing your home loan application, lenders can request bank statements from you to see how you spend your money and what you spend it on.
If they see you spend thousands of dollars a year gambling or spending a large amount on unnecessary things then they might be hesitant to lend to you, no matter how high your income is.
- You have a high credit card limit
It’s not just credit card debt that can send your application packing - simply having a credit card at all can work against you, especially if you have a high credit limit.
A lender will assess your ability to repay the credit limit you have, and will judge the whole limit as potential debt.
For example, it doesn’t matter if you only have a $100 balance on a credit card with a $10,000 limit - a lender will take that whole $10,000 into account as a liability.
Kate Forbes is a National Director at Metropole Property Strategists. She has over 20 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a Chartered Financial Analyst (CFA).
She is a regular commentator for Michael Yardney’s Property Update
Read more Expert Advice from Kate here!
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.