You just made an offer on a house, and the seller accepted it. Everything is going as per plan, and you’re excited to finally own a place and decorate it as you please. But then you find out you’ve been rejected for a home loan, and your perfect life crumbles. It sounds like quite the nightmare, but it’s not the end of the road.
Even if your home loan application was knocked down, it doesn’t necessarily mean you’ll not get approved the next time you apply. But it’s important to find out why your application was rejected and improve on those aspects to increase your chances of approval.
Why was your home loan application declined?
Understanding why your mortgage application was declined can prevent you from making the same mistake twice. You can ask your lender why your home loan application was rejected, but if you find they’re not very forthcoming, there are some things you can check yourself, such as whether you filled all the information correctly or not, if you attached all the documents, and if your credit score isn’t too low.
Apart from these common reasons for rejection, some of your habits like buying an occasional Lotto ticket or regularly borrowing money using a buy now, pay later (BNPL) service could raise a red flag for lenders. Here are some lesser-known reasons why home loan applications are rejected that may surprise you.
1. Lack of genuine savings
Genuine savings refer to the money saved by you from your income. You can build ‘genuine savings’ over time by budgeting and regularly putting away a portion of your income into a savings account.
When you apply for a home loan, lenders often want to see proof of genuine savings to check your ability to repay the loan. While genuine savings may not reflect your income, a regular saving habit indicates financially responsible behaviour, which lenders appreciate. If you don’t have any savings and live paycheque to paycheque, it could be an indicator that you don’t earn enough to service a mortgage or your expenses are too high for you to take on another debt.
If you plan to buy a house, it may be a good idea to start building some genuine savings before you apply. Even if your home deposit is gifted mainly by your parents, saving some money in a separate savings account for at least three months can help increase your chances of home loan approval. You could compare savings account interest rates and park your money in a high-interest savings account to help your nest egg grow faster.
2. Unstable employment history
There has been a spurt of resignations post-COVID, with many employees looking for greener pastures or better employment opportunities. While there’s nothing wrong with switching jobs if you find something better or aren’t satisfied with your current job, you should be aware of its impact on your home loan application.
Lenders like borrowers with stable jobs and income. Many lenders consider being employed full-time for at least a year in one role ideal. If you’ve recently switched jobs, it could be better to wait three to six months before applying for a home loan. This can help improve your chances of home loan approval. Or, you might want to wait to get your home loan approved before you decide to quit your job and shift to another role.
3. A gambling habit
Do you have the habit of picking up a Lotto ticket sometimes or indulging in online sports betting occasionally? What seems like a harmless indulgence could become the reason for your home loan application getting rejected.
Lenders are required to check your suitability for a home loan before advancing you the money to comply with the responsible lending criteria. One of the documents they’ll check to ascertain whether you can afford a home loan or not is your bank statement for the past few months.
Your bank statement can give lenders a lot of information about your saving and spending habits. Having recurring gambling transactions on your bank statement can give them the idea that you’re addicted to gambling or financially irresponsible, leading them to reject your home loan application in some cases.
You may think you can find a way around this situation by using cash for gambling, but lenders will most likely query any regular cash withdrawals, especially when the amount is large.
4. An overpriced property
A lender will have the property you want to buy professionally valued before approving your home loan. If you are paying more than what the lender thinks is the fair value of the property, they might not approve your loan, as it would be difficult for them to sell the property and recoup their losses if you default on your repayments.
Lenders are also hesitant to approve home loans for certain types of properties, such as high-rise apartments or those located in disaster-prone areas.
5. Poor spending habits
Your spending habits can impact the result of your home loan application. Lenders usually examine your bank and credit statements for up to six months to understand your saving and spending patterns and determine your suitability for a mortgage. Whether it’s your Netflix subscription or the occasional helping hand from a BNPL service like Afterpay, your digital spending is likely to grab lenders’ attention and potentially derail your mortgage application if you live paycheque to paycheque and don’t have any savings.
While lenders don’t judge where you spend your money, they want to ensure you can repay your home loan. Regular expenses like your morning coffee and various subscriptions can quickly add up, not leaving much room in your household budget to fit a mortgage repayment. Analysing your expenses before applying for a home loan can help you improve your chances of mortgage approval.
What to do if your home loan application was declined?
Having your home loan application declined is disheartening, but it doesn’t mean you cannot qualify for a home loan again. If your mortgage application was rejected, you should try to find out why your application was rejected and improve on those areas before applying again.
Speaking to a mortgage broker can help you avoid common mistakes, such as not filling out your home loan application correctly or forgetting to attach a document. A broker can also guide you if you don’t fit the bill of a standard borrower and in case you need to apply with a specialist lender, such as when you have bad credit, or you earn a non-standard income (for example, as a freelancer or contractual worker). You can also contact a Hashching expert if you want to find out more about non-standard home loans.