Having your home loan application declined can be a shock, but unfortunately, it does happen. The next thing to do is to find out why.
Listed below are the most common reasons why people are not approved for a home loan.
Your credit report is really important for lenders in determining if you are a good risk. Many borrowers don’t regularly check their credit report, so they have no idea what is listed. By checking your credit report, you can stay on top of what it contains and get any incorrect information fixed.
Lots of credit enquiries, paid and unpaid defaults and loans to payday lenders can all raise concerns for lenders. Always approach applying for credit with caution. Do your homework first and then apply for the one that you actually want. Personal loan, car loan, credit card, interest free, store card and even contracts with utilities providers like mobile phone or electricity, can all result in a credit enquiry on your credit report. Your aim should be to keep these to a minimum.
The more financial commitments and personal debt you have, the greater impact it will have on your application. Lenders also look at your net asset position. They compare your debts and assets and can be cautious about your application if you have lots of debt and not many assets to show for it.
Look to payoff debt with the highest interest rate first. Over time you can look to reduce your debt as much as possible. Other ongoing commitments such as phone contracts and gym memberships could also impact the cash available to make home loan repayments.
Income and expenses are the most important factors when lenders are assessing your application. Just because you have a large deposit and lots of assets does not automatically mean that you have the cash flow to make repayments on a new loan. Under the responsible lending legislation, lenders need to be sure that the ongoing repayment is affordable.
Lenders will look at your income and financial commitments and then calculate how much money you have left over for the repayments. This is called your borrowing power. If there is not enough money left over after expenses, you may not be approved for that loan amount. So how can you improve your borrowing power? You can increase your income by taking on another job, decrease your financial commitments to help free up more of your current income or apply for a smaller loan amount.
Lenders need to see that you are in a strong financial position and will be able to meet repayments for the long term. For most of us our main sort of income is from our employment so this needs to be solid. If you are the sole income earner in your household lenders will be even more cautious. Changing jobs recently or switching jobs often with gaps in employment could create doubts about your ability to consistently have income for repayments.
Recently starting a new job in a different position or a different industry could also create problems. You may find that some lenders may be cautious when using your income if you are on a probationary period. If you are looking to purchase a property in the near future, it is best to stay in your current job until your loan has been finalised.
If you are self employed and have an irregular income, you may find that lenders will not approve you for a standard home loan. However, many lenders offer specialised home loan products specifically suited to self employed people. State Custodians has flexible loan solutions to suit those with an irregular income.
Savings play a big part in the application process. Not only can it provide funds for the deposit, but it also demonstrates to lenders that you will be able to meet repayments after the purchase.
Most lenders will need to see a minimum of 5% of the purchase price that has been saved over a certain time period. Three months savings statements will be required to demonstrate this amount building up and being held in an account in your name. It is usually a requirement when you are borrowing over 85% of the property value. However, different lenders may have different lending criteria, so before applying for a home loan, make sure you check with your lender on what is required. Some examples of genuine savings include: Funds that are regularly saved in a savings account, term deposits or shares that have been held for 3-4 months and equity in an existing property. Gifts or proceeds of the sale of an asset although handy to have, are not considered genuine savings until these funds have been held in a bank account for around 3 months.
Not only can the value of the property come in lower than expected and cause your application to be declined but the risk ratings and the comments made by the valuer can create havoc too. Economic factors in particular locations can mean that the lender may be more conservative if things aren’t going so well in that location. The valuers appraisal gives an indication to the lender about whether prices are likely to fall or if the property may be difficult to sell in a reasonable time. These combined with comments around the state of repair the property is in can cause the lender to deem it unacceptable as it may be difficult to sell and recoup their money if you are unable to make your repayments.
Always chat to a potential lender about the location of the property you are interested in. They will be able to tell you if the location has any red flags but you won’t know for sure until the valuer has completed their report. Always proceed with caution when you are purchasing and don’t commit and exchange contracts before you have unconditional loan approval.
Being declined for a home loan may feel discouraging, but it doesn’t mean you can’t qualify for a different loan or won’t be successful next time. Take some time to review your finances and speak with different lenders about their requirements. The Lending Specialists at State Custodians have a range of home loans to choose from and can guide you through your options, clearly explaining what you need to do before going ahead. If you would like to speak to our team give us a call on 13 72 62 or leave your details here and they will contact you.