For many Australians, property ownership is the ultimate dream – but getting there can be a hard task. While it would be nice to have the means to afford a home outright, for most people finance approval is a necessity. But what do you do if your home loan application is rejected?
No one likes the feeling of rejection. Whether it was a rejection from a job you really wanted or from a romantic interest, rejection can sting. While we can’t take away the pain caused by being denied something you wanted, we can help inspire you to try again. There may still be hope for your home loan journey, so don’t be discouraged. Here’s our guide on home loan rejection and strategies that may improve your chance of application success.
Mortgage applications can be denied for a multitude of reasons, but usually it is because the lender doubts your ability to make repayments.
Lenders have a legal responsibility to make sure borrowers do not sign up for unsuitable loans. According to the Australian Securities and Investments Commission (ASIC), this means that by law the lender must:
Ask about your financial situation, requirements and objectives.
Take reasonable steps to verify your financial situation.
According to ASIC, an unsuitable loan would be one that you cannot service without suffering hardship or a contract that does not meet your needs. A lender might also reject your home loan application due to your credit report.
Your credit report lists financial details about you that may either make a lender more confident in your application or give them reason to doubt your ability to service the loan. It usually includes information such as:
Your repayment history.
Credit products (credit cards, personal loans, credit limits, etc.).
Defaults on bills, credit cards or loans.
Credit applications made.
Credit report requests previously made with credit providers.
Often, lenders will also evaluate prospective borrowers against the credit policy of the bank. This can differ between institutions and can include assessing an applicant’s employment type, credit history and income stream. For example, self-employed, casual or contract workers could struggle to meet the lending criteria of some banks.
Applicants who do not meet standard lending criteria may benefit from investigating non-conforming home loan options. These can be beneficial for those who do not meet traditional criteria.
Reasons why a home loan application might be rejected
According to moneysmart.gov.au, there are four reasons a lender might reject your home loan application.
Credit report lists defaults A default occurs when a payment is overdue by 60 days or more and debt collection has started. Defaults are listed on your credit report and in some cases may give the lender reason to deny your finance application.
Credit report lists overdue repayments If your credit report lists payments which are overdue by 14 days or more the lender may decide to reject your home loan application.
Insufficient income or savings If you cannot demonstrate enough income or savings to service the loan the lender may reject your mortgage application. This could also include not having a high enough deposit.
Evidence you would struggle to pay the loan After considering your income and expenses the lender may decide you would struggle to service the loan. Expenses can include your spending habits.
According to Savings.com.au, there are also some ‘lesser-known’ reasons your home loan might be rejected. For example, your age, property choice and type of employment could lead to home loan rejection with some lenders.
Age: the lender may deem you too old to be able to pay off the home loan for the entire term.
Lender doesn’t like property: The lender might think your property choice is too ‘high risk’ and not approve the loan.
Employment type: If you are self-employed the lender may view your income stream as unstable and hesitate to approve the loan.
‘Joke transactions’: Despite being funny, transferring funds with the description “drug money” or “for bail” may see your lender think twice.
Credit card limit: Although you might not intend to ‘max out’ your credit card, your lender still needs to consider the chance you could. Having a high credit limit can make you a riskier borrower.
Once you’ve understood why your home loan application was rejected, you can begin to work on strategies that might help you to improve your chances of approval next time around.
According to moneysmart.gov.au, applying for too many home loans in succession can look bad on your credit report, so it may be best to ensure all due diligence has been paid before reapplying. They recommend taking the following steps to improve your chances of approval:
Check your credit report: Apply for a copy of your credit report and check there are no mistakes. If there are, apply to the credit reporting agency to have them fixed. Mistakes could represent something as simple as a clerical error or worse, identity theft. Equifax, illion and Experian are all credit reporting agencies that can help you get access to your credit report.
Pay off existing debt: moneysmart.gov.au recommends getting debt under control before reapplying for a loan. This can be achieved by keeping up with existing repayments or making extra repayments where possible.
Refinance or consolidate debt with a lower interest rate: Consolidating and/or refinancing debt can help you to limit or reduce interest payments.
Budget: Budgeting can make it easier to keep track of savings. By accounting for income, expenses and savings, you may be able to find further scope to improve your savings. It could also make it easier to prove to the lender you will be able to keep up with home loan repayments.
Things you should know: Our information acts as a guide only and does not constitute as financial advice. In preparing it we did not take into account your lending objectives, financial situation or particular needs. Before making a decision on the basis of this information, you should consider how appropriate it is to your particular lending needs and objectives.