The 5 Main Reasons Your Loan Applications are Rejected, and How To Overcome Them

In tough market conditions (like the ones we are in today) a lot of would be investors are having their loan applications rejected. In this post I am going to lift the lid of 5 of the main reasons loan applications are rejected and how you can get around this rejection criteria.

1. No Demonstrated Savings

Being able to demonstrate a track record of savings shows to the bank that you are able to put extra money aside that will eventually go towards your home loan. This gives them confidence in your ability to pay off your mortgage. Having demonstrated savings of at least 3-5% of the deposit is a must (even with the first home buyers grant) and 10-20% is ideal.

Solutions to avoid rejection
– If you have been given a gift as a deposit then leave it in your bank account for 3 months before applying for a loan. In most cases the lender will then count this as ‘proven savings’.
– It may be helpful for you to use a separate bank account (you can set up online savings accounts for free) and make a regular deposit into this account to show your savings history to the banks/lenders.

2. Loan Serviceability

When it comes to loan serviceability two things appear very important to lenders:
a) The size of your income
Your income needs to be larger enough so that you can afford to service the loan and to still be able to feed yourself afterwards

b) The security of your income
Generally lenders like to see that you have a stable income before they will lend you money. This means that if you are in your 3-6 month probationary period then your chances of obtaining a loan are greatly reduced.

Strong applications will often show the borrower being with their current employer for 2 years or more. If you run your own business then lenders like to see that you had been in business for at least 2 years.

Solutions to avoid rejection
– If you need to buy and are in your probationary period you may need to go in with another buyer who has the stable job, or get someone to guarantor your loan.
– Always shop around, just because one lender rejected your application doesn’t mean the next lender will.

3. Credit Rating Issues

A black spot on your credit record (such as an unpaid bill or credit charge) is likely to hold up your application or even stop you from having a successful application. This can be as simple as an unpaid phone bill, but any application with a poor credit check will cause your application to be more heavily scrutinized.

Even excessive activity on your credit check (like shopping around for finance) can cause problems also.

Solutions to avoid rejection
– Get a copy of your credit report and check for any outstanding payments that appear on there. Make those payments and get them off your credit report.
– Maintain your oldest credit card, and keep it paid off. By keeping a longstanding credit card you allow lenders to see your long term borrowing history. This may increase your chances of a successful application.
– Go to your lender of choice first. As excessive activity can stop lenders from processing your application go to your lender of choice first, then work your way down the list.

4. Not Enough Funds

Lenders want to reduce their risk. This means that if you fail to make payments they want to be able to sell your property and more than cover the price of the loan.

If you have less than a 20% deposit they will make you pay ‘lenders mortgage insurance’, which is a fee for not having a large enough deposit.

Too small of a deposit could definitely be an issue, especially if you look risky in other criteria.

Solutions to avoid rejection
– Have a 10-20% deposit, even if only 5% of it is “proven savings”
– Don’t buy something you can’t afford. Consider entering the market at a lower level
– Use the first home owners grant. That money could push you over the line for a yes to your application.

5. Lack of Equity For Refinancing

If you are wanting to refinance your property to buy another property then a lack of equity in your existing property could cause issues if it not worth enough or is undervalued.

Lenders want to see you can easily afford to pay your loan, so you need to do everything you can to show them this.

Solutions to avoid rejection
– Prepare your current property for valuation. Make it look beautiful and immaculate as to obtain the highest valuation
– Show rental income (if you have any) so that the banks can see that you can afford the new higher mortgage payments.
– Try another lender. If your lender undervalues your property then you may need to go to another lender to get a true valuation on the property.

These 5 main reasons are not conclusive but they do give you a good idea of why loan applications are rejected and how you can do your best to get a yes!

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