Planning to join the property market and take advantage of the currently prevailing low interest rates in the market? With the mortgage market turning increasingly competitive, the time is ripe to invest in the property. But does this mean getting a home loan is as easy as wishing to buy your dream home?
Mostly, borrowers who know how much to borrow and are well armed with the loan documents needed for home loan application, apart from at least 10% deposit (the more the better) stand in good stead to secure financing for their piece of the property. Having a mortgage pre-approval further increases the chances (but not assures) of home loan approval by banks. But despite all the heady advice floating around in the market, a large number of home loan applications are declined by banks for reasons as simple as providing improper home loan documents.
Forewarned is forearmed and we help you avoid fear of rejection by bringing to surface 5 top reasons why banks may reject a home loan application:
1. Lack of genuine savings – Lack of genuine savings for at least 3 months can be a major reason for lenders to reject your mortgage application. Building savings for at least few months before you apply for a home loan helps build lenders’ confidence in your ability to repay the loan. It can be a good idea to open a high interest rate savings account and deposit money in it regularly to have a clear proof of your monthly savings. Also, any money received as a gift doesn’t qualify as savings unless it has been in your account for few months.
Another major loan process that keeps people away from buying property is not having enough deposit. A home loan specialist can help in this regard by advising you on low deposit loan options such as guarantor loan and paying LMI to borrow more.
2. Bad credit history – Any missed utility payments (as small as your mobile bill) can be instrumental in derailing your home loan application. Missed repayments, bad debt and missed utility payments stay on your credit file for long thereby lowering not only your credit score but also the lenders’ faith in lending to you. Before you apply for a loan, it may be a good idea to pull out your credit file and check it for any potential black marks that would adversely affect your home loan application. We provide you some tips on maintaining a high credit score.
3. Unstable employment – Switching jobs right before you apply for a home loan or during pre-approval can be a red flag for potential lenders. Banks prefer borrowers with stable employment and income, as it reassures them of the borrower’s capacity to repay the loan. Apart from your income, lenders also take into account your debt to income ratio and in case you have incurred heavy debts (before or after pre-approval), lenders may not be willing to lend to you.
4. Lack of equity – Many investors build their property portfolio by using equity built in property A to fund the deposit for financing property B. However, often borrowers feel their property is worth much more than it really is and find themselves facing rejection when they contact a lender for an equity loan. Avoid such a situation by having your property valued by a professional valuer and plan your purchase accordingly.
5. Over valued property – Banks need to verify that the property you are buying is worth what you are paying for and factors such as the location of the property, council plans, neighbourhood and pre-inspection report, all play an important role in this decision. As part of the home loan application process, lenders will have a valuer check of the property and also get a pre-inspection done along with checking the title of the property before they decide to lend to you. In case they think the property has some major defects or not worth the amount you are paying for it, they have good reason to reject your home loan application. Avoid such rejection by thoroughly researching the property you are buying. Grab your free property report to understand your chosen suburb better.
Knowing these 5 reasons for rejection will definitely help you prepare your home loan application better.
Before you approach a lender, compare home loans online to find the best deals in the market. Just in case a lender has rejected your home loan application, here are some tips on how to deal with rejection:
1.Contact a mortgage broker and explain your situation in detail. A mortgage broker would be able to guide you to the right lenders who might be willing to lend to borrowers in your situation. Expert brokers on HashChing have helped hundreds of borrowers with approved home loans and will be happy to answer all your home loan queries online, free of cost.
2. Have a guarantor or a co-signor back your home loan application. With a person having a high credit score backing your home loan application, it makes your case much stronger for approval.
3. In case you struggling with bad debt, it makes sense to reorganize your debts and seek expert help to get your finances back on track. You can seek financial hardship assistance if you find yourself struggling to make ends meet.
By Vidhu Bajaj