This article was originally published in 2016 and has been updated.
Doing some homework before you apply for a home loan can pay big dividends when you approach a bank.
Banks reject home loan applications for a variety of reasons, making it a complex landscape that can be hard for consumers to navigate.
Give yourself the best chance of securing a home loan by making sure all your financial affairs are in order, your pay slips are in hand, and that you don’t over-stretch the truth, says Aussie’s general manager of strategy and product, David Smith.
“Lenders are moving swiftly to adopt regulatory changes and keep up with rate changes, which can make it difficult [for borrowers] to understand which lender is the best option for them,” Smith says.
But it’s easier if you know the main reasons home loans are rejected, so we have compiled a list for you:
1. Insufficient funds
This is one of the top reasons for rejection, particularly if you’re trying to borrow more than 80 per cent of the value of the property.
“Home loan applicants need to be able to demonstrate that they can comfortably service the debt, even if interest rates rise down the track,” says Smith.
“You’ll also need to provide a record of genuine savings to prove you are able to service the debt you’re trying to take on and demonstrate that the loan isn’t beyond your means.”
Proof of a reliable and consistent income is also paramount. This may include a guarantor willing to top up the mortgage repayment if required.
2. Inadequate deposit
By the time you’ve saved what you think will be enough to buy a home, the market might have changed and you need an even bigger deposit. It can be a never-ending cycle, according to the former finance editor of onthehouse.com.au, Peter Boehm.
“Lenders can feel uncomfortable [with clients] borrowing more than 80 per cent of the value of a property, so you simply might not fit their specific criteria,” Boehm says.
He advises checking the lender’s criteria before you put in your application. And your application is more likely to succeed if you have some equity in other properties.
3. The house is in a bad area
The lender will want to establish that the property you want to buy exists as you’ve described it, and that a valuation proves it’s a worthwhile purchase, Smith says.
And your loan is likely to be approved only if the lender deems the property to be in a good area, according to Vince Barca, broker credit manager at ME Bank.
“Where the property is located and the state of the surrounding area is a big part of the decision-making process for a lender,” he says.
The lender will consider the condition of the property, whether it has structural problems, high voltage power lines nearby or other aesthetic issues, Barca says.
4. Bad credit history
Boehm warns that not paying your mobile phone bill in your teens can come back to bite you later in life.
“The chances are that unpaid bills of any kind will show up on your credit history, so make sure you get a copy of your credit file and see how you look on paper,” he says.
In Australia, you can obtain your file from places such as www.creditsavvy.com.au.
“The worst thing you can do is try to hide bad debt, because it’s going to get discovered and, when it does, the lender will definitely knock you back,” Smith says.
5. A rejection from a third party
You might have passed the lender’s criteria with flying colours but if you’re borrowing more than 80 per cent of the property’s value, the lender’s mortgage insurer might be uneasy.
This insurance may be required when you’re borrowing at what the bank deems to be close to your capacity, Boehm says. “Bear in mind that you’ve always got to satisfy more than just one person in this process,” he says.
6. Any signs of instability
Lenders will want to check whether you’re going to stay in your job, and that you have employment continuity.
Barca says any sign that you are an unacceptable risk lowers the chances of your loan being approved.
“The ideal applicant has been in their job a couple of years and can demonstrate that they’re employed in a stable environment,” Barca says.
Have you successfully applied for a home loan? Do you have any tips for getting it right the first time? Tell us in the comments below.