Home loans explained
Why home loans are rejected
6 min read
There are lots of different reasons that home loans can be rejected. Some reasons are more common than others, and knowing what they are can help you better prepare to apply for a home loan.
Not having enough money saved for a deposit is one of the more common reasons home loan applications are rejected. Generally speaking, lenders will want you to have a deposit of 20% of the property’s value (deposits lower than 20% typically mean you need to pay Lender’s Mortgage Insurance (LMI)). Another factor that determines how much deposit you need is the maximum loan-to-value-ratio (LVR) of the loan you are applying for.
LVR is basically a fancy name for the percentage of a property’s value that you can borrow (e.g. for a loan with an LVR of 80% you can borrow up to 80% of the property’s value). So, if you have a deposit of $40,000 saved up and you want to apply for a home loan with an LVR of 80%, the maximum you could borrow is $200,000 ($40,000 x 5). Or to go the other way, if you want to buy a $400,000 property and you want to apply for a loan with an LVR of 80%, you would need an $80,000 deposit ($400,000 x 0.2, or 20% of $400,000). Your deposit represents 20% of the property value, and the LVR represents the other 80%. 20% + 80% = 100% of the property value!
What all this means is that the numbers need to add up in order for your home loan application to be approved. If you want a home loan with 80% LVR for a $500,000 property, but you only have $50,000 saved up, you will likely need to look at paying LMI, saving up more of a deposit, or lowering the amount you wish to borrow.
Your income is one of the main ways a lender determines whether you’ll be able to repay your loan. Part of being a responsible lender is making sure that customers are ‘serviceable’, which essentially means ‘able to make their loan repayments along with their other financial obligations’, and that making those loan repayments wouldn’t cause the customer to experience financial hardship. Basically, lenders need to make sure you won’t struggle to repay your loan while also paying your other expenses. They also need to account for a ‘worst case scenario’ where interest rates may rise. To do all this, they need to determine how much income you have, how much your expenses are costing you, and whether there is enough room in your budget to fit in home loan repayments as well. If the numbers don’t add up and your loan repayments would push you into financial hardship, a lender won’t be able to approve your application – it just wouldn’t be responsible to do so.
When a lender is confirming your income and expenses, they will look at the transaction history of your bank accounts. So if you live a lavish lifestyle or if your Afterpay repayments are getting out of hand, they may have to reconsider approving your application. It can be a good idea to show lenders how frugal you can be by spending less and saving more. Cutting back on unnecessary spending doesn’t just show the bank how well you can save, it will lower your expenses overall, which also helps.
Your credit score is based on your credit history and represents your risk of future defaults. Your credit score helps lenders assess how much money you can borrow. Things that can negatively affect your credit score include defaults, missed repayments, and bankruptcies. But thanks to Comprehensive Credit Reporting, the good things you do will also be included in your credit history. These things will include information about the current credit accounts you hold, what credit accounts you’ve opened and closed, the date any default notices were paid, and whether you’ve met your repayments.
When you apply for a home the information that you’ll need to provide includes:
If any of this information is incorrect in your application, your home loan application assessment could be delayed or your application could be rejected, so it’s important to double check before you submit it!
Home loan lenders can’t decline your application purely because of your age. But if you are nearing retirement, they will want to know how you plan to make your loan repayments once you are no longer working. Similarly, if you are a younger applicant you may not have enough credit history to give you a high credit score, but this may just mean you’ll need to provide additional information.
Not all lenders will lend to all types of properties. For example, at Tic:Toc we can only lend to established properties in capital cities or major regional centres. And sometimes the property you are wanting to buy is bit too unique/different, making it appeal to only a specific market. This means the property is less marketable and more of a risk, and some lenders will be wary of approving loans for these kinds of properties.
Contract work can be considered less stable and so lenders may require you to be employed in your line of work for a minimum period. This helps them to see that you are able to support yourself financially and have a relatively stable income. Tic:Toc requires self-employed applicants to have been working for a minimum of 2 years.
It’s not just the amount of debt that you currently have that impacts your home loan application. Lenders will also look at your credit limits. Which means even if you don’t currently owe anything on your credit card, your credit card’s limit will still impact your application. It can be a good idea to lower your limits as much as possible to ensure you have the best possible chance of being approved.
Generally speaking if you have just had, or are about to have a change in circumstances that results in a change in your income (even temporarily), lenders will need to take this into consideration when you apply for a loan. Lenders will want to understand your situation and how it will affect your ability to meet your loan commitments.
Lenders want to see that you have secure income so you’ll be able to comfortably make your loan repayments. If you’ve recently started a new job, they will need to take this into consideration. New jobs often come with probationary periods which could mean your position in the company isn’t secure. If you’ve changed jobs recently, you may need to provide additionally evidence that you’ll be able to manage your loan repayments.
There are many different reasons why a home loan application could be declined. Some are more common than others, but knowing each of them can help you better prepare to be in the best possible position to get approval for your home loan.
If you think you're ready to apply you can get started here!