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It’s frustrating to spend time and effort on your mortgage application, only to find out it doesn’t get the green light. If your first reaction is to try again with another lender, do so very carefully. Your credit file shows a record of every credit application you make. So if you submit several home loan applications within a few months, there’s a good chance you’ll scare off potential lenders.
A better option is to delay re-applying while you remedy the reason for the rejection of your application. How long you have to postpone will largely depend on the issue you’re dealing with and the lenders’ wait time between re-applications. For example, let’s say the lender rejected your application due to an unsatisfactory Net Service Ratio (NSR). In other words, they believe you can’t afford the mortgage repayment because too much of your income is needed to service your debts. In this scenario, it would make sense to focus hard on paying down your debts before you put in another application.
For next time around, you might have a better chance of success if you apply with the help of a mortgage broker. Yellow Brick Road’s brokers will ensure your application has every chance of success by alerting you to any shortfalls or discrepancies which a lender may query.
Each lender has different criteria for home loan approval, so what may be a roadblock for one, might be acceptable to another.
Get it right from the start with professional help.
ere we look at the top reasons lenders reject mortgage applications. For each, we suggest ways to turn a rejected application into a winning one the next time around.
1. Inadequate income
Lenders want to know you can afford to pay your minimum monthly mortgage repayments and other debts without financial stress. In doing so, they will assess your income, expenses, commitments and prospective loan repayments to work out the amount of money left over after you’ve covered all your outgoings. A buffer is usually added into this calculation to cover an increase in repayments if interest rates rise. If you have little left from your income, your capacity to pay back a loan will come into question.
What to do?
Be realistic with what you can afford to borrow, which may mean lowering your expectations about the type of property you can buy. Keep saving towards a more substantial deposit as this will boost your chances of being approved. Use a living expenses calculator to see how much you’re spending and apply budget cuts where necessary. Avoid changing jobs leading up to a loan application so you can demonstrate income stability.
2. Credit file defaults
Your credit file is used by lenders to form a picture of your credit commitments and your ability to repay debt. It will count against you in the eyes of the lender if you have an insufficient credit history, or your credit report shows a history of late bill payments and defaults.
What to do?
Obtain a free copy of your credit report before putting in a mortgage application. First, ensure the information in it is error-free. Next, take steps to ensure you break the habit of late repayments. Arrange for a direct debit, for example, to pay off your monthly debts automatically as soon as your salary hits your bank account. Chip away at your debt to avoid any new default listings. Your credit report will start to reflect these positive changes.
- Useful reading: Bad Credit and How to Clear It
3. No proof of savings
‘Genuine’ or ‘demonstrated’ savings shows that you have saved a certain amount over time towards your deposit. If money for your deposit comes instead from a work bonus or inheritance, lenders aren’t able to gauge your saving habits. Lenders usually want applicants to have a minimum of 5% in genuine savings as part of your deposit, particularly if you’re borrowing more than 90% of the property value.
What to do?
Talk to your Yellow Brick Road mortgage broker about ways to bypass the need for genuine savings. For some lenders, it’s enough to show you meet other criteria like stable employment and income, a decent deposit and proof of assets. Others will accept money gifted from parents, provided it sits in your account for the minimum wait time, and you meet the eligibility criteria. A Family Guarantee Loan is an alternative solution.
- Useful reading: Top 5 Questions We Get Asked About Genuine Savings
4. Insufficient deposit
Each lender sets their own limits on the maximum amount you’re allowed to borrow in relation to the value of the property you want to buy. Known as loan-to-value ratio (LVR), their decision will depend on variables like the loan amount, your credit history and the type of loan you’re applying for.
Lenders want to see that you meet their LVR requirements. There will be a minimum deposit needed for the purchase of the property and documentation to prove your income and earnings. If your deposit is less than 20% of the purchase price and you don’t have evidence of genuine savings, it may be harder to get the type of loan you want.
What to do?
Talk to your mortgage broker about your options. We’re familiar with a wide range of loans and lending criteria, so we know how different lenders are likely to assess your repayment ability. Together we can get a clearer idea of how much deposit you need based on a realistic calculation of your borrowing capacity.
Full doc applications – where income evidence is provided – can usually borrow up to 80% LVR. If the lender deems you to be in a stable financial position, they may offer you closer to 90% or 95% LVR. Better still, if you have a guarantor to support your application. There’s also the option to pay Lenders Mortgage Insurance.