In a recent survey, Finty Australia found the key reasons why most Aussies were getting rejected from their dream home and the common pitfalls for all hopeful new homeowners.
Bill Natividad, who conducted the survey, explained what they found, “your home loan might have been rejected due to a low credit score, small deposit, or failure to meet serviceability requirements.”
These are common reasons lenders deny applications. Other factors can include a lack of savings or an unsuitable loan structure.
“Don’t give up if your loan is rejected. You can take steps to improve your chances next time. Start by asking the lender why they said no. Then, work on fixing those issues before you apply again. This might mean saving more for a deposit, improving your credit score, or looking for a different type of loan.” Bill told our reporter.
Credit History Concerns
Your credit history plays a big role in whether you get a home loan. Banks look closely at your past money habits to decide if you’re a safe bet.
Low Credit Score
A low credit score can stop you from getting a home loan. Banks use this number to guess how likely you are to pay back loans. If your score is under 600, you might have trouble. Banks see you as risky. They might say no or charge you more interest.
To boost your score, pay bills on time. Keep your credit card use low. Don’t apply for new credit too often. It takes time, but your score can go up.
Credit scores are a key factor in home loan decisions. Work on yours before you apply.
Recent Defaults or Bankruptcies
Banks don’t like seeing defaults or bankruptcies on your credit report. These show you’ve had money troubles before. A default stays on your report for 5 years. Bankruptcy sticks around for 7 years.
If you have these, wait before applying for a home loan. Use this time to fix your finances. Save money. Pay off debts. Show banks you’ve changed your ways.
Some lenders might still give you a loan, but it’ll cost more. You’ll likely pay higher interest rates.
Multiple Credit Enquiries
Too many credit checks can hurt your chances. Each time you apply for credit, it shows up on your report. Lots of enquiries in a short time make banks nervous. They think you might be desperate for money.
Space out your loan applications. Don’t apply to many banks at once. If you’re shopping for rates, do it within a short period. Credit agencies often count these as one enquiry.
Be careful with ‘buy now, pay later’ services. These can count as credit checks too. Use them wisely to keep your credit report clean.
Income and Employment Stability
Your job and earnings play a big role in getting a home loan approved. Lenders want to see steady work and enough money coming in to cover your mortgage payments.
Unstable Employment History
Banks like to see you’ve been in the same job for a while. Changing jobs often can make you seem risky. They usually want to see at least 6-12 months in your current role. If you’ve hopped between jobs a lot, it might raise red flags.
Gaps in your work history can also be a problem. If you’ve been out of work for long stretches, lenders might worry about your ability to pay back the loan. They’ll want to know why you weren’t working and how you managed your money during that time.
New jobs can be tricky too. Even if it’s a step up, lenders prefer to see a solid track record in your role before approving a big loan.
Insufficient Income
Your pay needs to cover your new mortgage plus your other bills. Lenders use a debt-to-income ratio to check this. If your income is too low compared to your debts, you might get knocked back.
Some tips to boost your chances:
- Pay down other debts first
- Save up a bigger deposit
- Look for a cheaper house
- Get a second job or ask for a raise
Remember, lenders look at your take-home pay, not your gross income. Taxes and other deductions can really eat into what you have left for mortgage payments.
Casual or Contract Work Challenges
If you’re not in a permanent job, getting a home loan can be harder. Banks see casual and contract work as less stable. They worry your income might drop suddenly.
For casual workers, lenders often want to see:
- At least 12 months in your current job
- Steady hours and pay
- Proof you’re likely to keep getting work
Contractors face similar hurdles. You’ll need to show a history of ongoing contracts and a strong chance of future work.
Self-employed people might need to provide extra paperwork. This could include tax returns and business financial statements for the past two years.
Loan and Property Factors
Getting a home loan can be tricky. Banks look at many things about the property and the loan itself when deciding to approve or reject your application.
High Loan to Value Ratio
A high loan to value ratio (LVR) can lead to home loan rejection. LVR is the amount you want to borrow compared to the value of the property. Banks prefer lower LVRs as they’re less risky.
If you’re asking for more than 80% of the property’s value, you might face problems. You’ll likely need to pay Lenders Mortgage Insurance (LMI) which adds to your costs.
To lower your LVR:
- Save a bigger deposit
- Buy a cheaper property
- Get help from family as guarantors
Property Valuation Issues
Banks do their own valuations on properties. If their valuation is lower than the purchase price, it can cause issues.
This can happen if:
- You’ve paid too much
- The market has dropped
- The property has problems
A low valuation means the bank might offer less than you need. You’d then have to make up the difference yourself.
To avoid this:
- Research property prices in the area
- Get an independent valuation before making an offer
- Be wary of ‘off the plan’ purchases where values can change
Type of Property
Some types of properties are seen as riskier by banks. This can lead to loan rejection.
Properties that might cause issues include:
- Studio apartments under 40m²
- Properties in high-rise buildings
- Rural properties
- Properties in mining towns
Banks worry these properties might be harder to sell if you can’t repay the loan.
If you’re looking at an unusual property:
- Check with your bank first
- Be prepared for a higher deposit or interest rate
- Consider a specialist lender who deals with these property types
Debt and Financial Commitments
Your existing debts and money obligations play a big role in home loan approval. Banks look at these closely to decide if you can handle more debt.
High Level of Existing Debt
Banks check your debt-to-income ratio when you apply for a home loan. This shows how much of your income goes to paying debts each month. If it’s too high, you might get rejected.
A high ratio means you’re using a lot of your income for debt payments. This leaves less money for a new home loan. Banks worry you might struggle to pay back the loan.
To improve your chances:
- Pay down existing debts
- Increase your income
- Wait to apply until your debt levels are lower
Too Many Financial Commitments
Banks also look at your other regular expenses. These can include:
- Rent
- Car payments
- School fees
- Credit card bills
- Personal loans
Having too many of these can make banks nervous. They worry you won’t have enough money left for home loan repayments.
To boost your chances, try to:
- Cut back on non-essential expenses
- Pay off smaller debts
- Show a history of good money management
Banks want to see you can handle your current commitments before taking on a big home loan. They need to trust you’ll make your payments on time.
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