January 11, 2017
Home loan rejection is the biggest reason home buyers do not take out a mortgage. Rejection can be disappointing, especially for those who had their heart set on buying a property. But, you can avoid this scenario if you cover all bases before applying for a home loan.
Let’s look at the main reasons why home loan applications get rejected. Knowing why rejections occur can allow you to prepare yourself when applying for a loan.
Your ability to cover your loan repayments is not the only factor that a lender will consider. They will also look at how much residual income you have. Residual income is typically the amount of money you have left over after you have paid for expenses. Therefore, this includes spending money on lifestyle and personal expenses, such as eating out regularly or buying designer label clothing. Consequently, excessive spending may show that you’re not in control of your money and this can indicate financial risk.
While you can promise you will kerb your spending after you have taken out your mortgage, a lender will need evidence. Thus, a lender will typically look at your spending habits before you getting loan approval. Then they will deduct these habitual expenses from your income to give them an idea of your expenses.
A lender will also want to see evidence of your ability to save. Hence, if you have sold a car or other goods for a home deposit, then this may not be enough. The same applies to parents donate you the money. Most lenders need a savings history of 6 to 12-months, so they have evidence of your finance management.
Having a healthy credit history without any blemishes on your record will encourage a lender to approve your loan. Financial institutions loathe seeing defaults or late payments. When you apply for a loan, a lender will review both internal and external payment history. Internal’ refers to banks and financial institution payments, and external’ goes for any outstanding bills.
Credit histories are a reliable indicator of how someone will maintain their home loan. Subsequently, if you have credit history issues, then you need to tidy these up before applying for a home loan.
Having a poor credit history does not necessarily mean that you will not get home loan approval. But, it can mean that you will incur a higher interest rate. Plus, understanding your credit score will allow you to counteract it when applying for a loan. For instance, an excellent savings history will negate a poor credit history. You may also need to explain to your lender why an event has occurred on your credit history. Your lender can then establish their level of risk.
Most lenders do not like risks, they would prefer to keep these to a minimum. Accordingly, a client with a poor payment history, no savings and high expenditure will not gain loan approval. However, a client with an excellent credit score and savings history will.
Other risk factors for lenders include property location and the type of property that you want to buy. For example, some suburbs and buildings, such as inner-city apartments, are a higher-risk than others. As a result, lenders may be reluctant to approve a loan if you are looking at these property types. To avoid this situation, check lender blacklists and find a property that is outside of these areas. Such an approach will give you a greater chance to secure a home loan and to meet lending criteria.
Written by Refinancing.com.au
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