Securing a home loan is a crucial milestone in the journey to homeownership for many individuals. However, lenders may decline mortgage applications if they believe that the borrower may struggle to meet the repayment obligations or that the loan might pose a risk of financial hardship.
While it’s not advisable to pursue a loan beyond one’s means, having your mortgage application rejected despite having the ability to service the loan can be disheartening. Various factors, such as a low home loan deposit, a poor credit history, or the choice of property, can contribute to this outcome.
If you plan to apply for a home loan, we have outlined some common reasons mortgage applications may get rejected.
1. A low credit score
The credit score needed for a mortgage can differ among lenders and is influenced by factors such as income, savings, and deposit amount. However, major credit reporting agencies generally classify credit scores into five tiers. Though the specific score ranges may slightly differ between credit bureaus and lenders, the common categories are Poor, Fair, Good, Very Good, and Excellent.
Typically, a credit score of 700 and above is considered good by both Experian and Equifax. It’s important to note that even with a score of 700+, approval is not guaranteed, as lenders have varied criteria but generally prefer applicants with good or higher credit scores.
When applying for a home loan, it’s advisable to check your credit score and review your credit report. While a score of 700+ is positive, it doesn’t ensure automatic approval. Lenders have individual criteria regarding credit scores, leaning towards those with good or better credit.
To enhance your credit score, ensure timely bill payments, work on reducing outstanding debts, and avoid unnecessary credit inquiries. Regularly check your credit report for errors, addressing them promptly to prevent any negative impact on your creditworthiness.
3. A low deposit
Lenders typically require a deposit of at least 20% of the property purchase price. A small deposit can raise concerns about your commitment and financial capacity, leading to rejection. To prevent this from happening, plan to save diligently and try to meet the minimum deposit requirement.
If you’re a first-time home buyer, you can check your eligibility for your state or territory’s First Home Owner Grant, as it can contribute towards your deposit. If you’re lucky, you may receive some financial assistance from your parents, but keep in mind that providing at least 5% of the deposit from your genuine savings is often required.
Another option is Lender’s Mortgage Insurance (LMI), which safeguards the lender if the borrower defaults on the loan. While some lenders may consider applications with low deposits, the genuine savings requirement may still apply.
Genuine savings refer to money saved directly from your income. Building ‘genuine savings’ over time involves budgeting and consistently allocating a portion of your income into a dedicated savings account.
When applying for a home loan, lenders often seek proof of genuine savings to assess your repayment capability. While genuine savings may not directly reflect your income, a consistent saving habit signals financially responsible behaviour, a trait appreciated by lenders.
3. Insufficient documentation or incomplete details
Failing to submit the required documentation, such as bank statements and employment details, in a timely manner, can lead to rejection.
Your home loan application can also get rejected if all sections of the application are not filled out correctly. Lenders follow strict procedures to verify potential borrowers’ personal and financial details. Any attempt to conceal or omit information is likely to be discovered during the lender’s verification process.
For example, failing to mention a credit card, even if it’s no longer in use, can pose a risk. Omitting expenses like childcare or details of dependents can also be risky.
In certain situations, lenders may request additional information while assessing your loan application. It’s advisable to promptly provide the requested information or documents to ensure a smooth application process.
Delays in providing necessary details could lead to rejection due to a lack of information or incomplete documentation. Being thorough and transparent in your application is crucial for a successful home loan approval.
4. The property you choose
Your home loan is secured against the property you buy. If the lender perceives it as overpriced or foresees challenges in future resale, they might deem it risky and reject your home loan application.
For instance, properties in disaster-prone areas, high-rise apartments, studio apartments, and those needing substantial renovations can present challenges in securing home loans. If you’ve identified one of these property types after receiving pre-approval, there’s a chance your application could face rejection by the lender.
Before you decide on a property, review a lender’s criteria to make sure you choose a property they’re likely to approve. Being proactive and meeting the lender’s criteria increases your chances of getting your home loan approved.