Why Would a Mortgage Lender Decline Your Mortgage Application? 10 Reasons Explained
Setting your eyes on a dream property is one thing, but making it a reality? That can sometimes be a whole lot more complicated. One of the biggest obstacles that you may need to overcome before committing to buy a property is obtaining finance. At this point, you might be thinking, “No problem, I’ve got a steady job and my income can cover the monthly repayments.” So, why would a mortgage lender decline your mortgage application?
You may be surprised to hear that reasons for mortgage rejection can be more complicated than you think. Fortunately, there are some simple things you can do to greatly increase your chances of your home loan being approved. And understanding mortgage application rejection is the first step towards successfully avoiding it!
Home Loan Declined – Why Would a Mortgage Lender Decline Your Application?
Why would a mortgage lender decline your application? According to one survey, around 40% of all home loan applications were rejected during December 2018. The recent cost-of-living crisis, coupled with rising interest rates and the COVID hangover has only made things more difficult.
One of the most common reasons for mortgage rejection is simply that you’ve applied to the wrong lender. Lending criteria and risk assessment will vary significantly depending on the lender. This is why it’s so important for borrowers to start by doing an honest assessment of their credit history and current financial situation.
This information can then be used to evaluate whether or not a particular lender’s mortgage application rejection factors will apply in your case. While this might sound like a complicated process, it’s actually good news for anyone wondering how to avoid mortgage application denial. Because an experienced mortgage broker can do all the hard work for you!
Top 10 Reasons for Mortgage Application Rejection
There are several mortgage application rejection factors to consider, but usually, it will come down to one of the following 10 reasons:
Your current lifestyle
Lenders will look at your spending and saving habits as major approval or rejection indicators. If you can cover your daily expenses while living within your means (and still leaving room for a few treats here and there), then this shouldn’t be a huge deal. Banks will also consider if you are buying multiple luxury items or racking up credit card debt to determine if your lifestyle is more needs- or wants-based.
You didn’t disclose everything
Leaving relevant financial information out of your application is never a good idea. Lenders have access to bank statements and will definitely find out if you have expenses, debts or accounts that you failed to disclose or are trying to hide. Additionally, most lenders subscribe to “active credit” reporting. This means they’ll be able to easily confirm how reliable you’ve been at making repayments on time and or how well you’ve done at staying under your credit card limit.
You have a poor credit history
A history of not being able to pay for loans is a big red flag for lenders, as this shows that you can’t stay on top of bill deadlines. Late payments on phone or utility bills may also hurt your credit score.
You don’t have a credit history
You may think that having absolutely no history of debt is the best way to impress a bank – but that’s often not the case. The absence of a credit history can be just as unappealing as a bad credit history. However, some lenders appreciate that a person might be wary of credit cards because they encourage overspending. In this case, the lender might ask for other records that show that you are responsible with money.
You have a criminal record
Unfortunately, a criminal record is one of the most common reasons for mortgage rejection. Make sure you talk to a broker before applying if you’re unsure how a criminal record could affect your application.
Your spending habits
Lenders don’t really care if you’ve received a hefty inheritance or had a major win at the pokies. It’s also not a big deal if you’ve received help from your parents in saving for your deposit. But lenders will be very interested in how responsible you are with your money and your debt repayment history. If you’re consistently relying on bailouts to pay your bills, then this could be a significant mortgage application rejection factor.
You’ve been job-hopping in the past year
Why would a mortgage lender decline your application? A very common reason is that you haven’t been at your current job very long (or you’ve changed jobs multiple times in the past few years.
You don’t receive regular pay
Banks are more cautious if you are self-employed, do seasonal/shift work or are paid on commission. If you can’t provide payslips showing a routine payment from an employer, then a lender may worry about how you will be able to make monthly mortgage repayments on time.
You didn’t do your taxes
If you’re a self-employed borrower then banks like to see a consistent record of tax returns being lodged. If you’re behind on your taxes, then this could count as a valid reason for mortgage rejection.
You want to borrow more than you can handle
There’s nothing wrong with aiming for the stars. But if banks think that you’re asking for far more than you can handle, you’re unlikely to get it. Additionally, if the loan amount that you’re requesting is on the unrealistic side, a bank will start to think that you’re not their ideal borrower.
Top 10 Tips on How to Avoid Mortgage Application Denial
If the above list has you feeling anxious about mortgage application rejection factors, then don’t panic! As they say, forewarned is forearmed. By understanding mortgage application rejection, you’re more likely to successfully avoid it. Here are our top 10 tips on how to avoid mortgage application denial:
1. Live within your means: This doesn’t mean you can’t have any fun. But lenders will appreciate evidence of you holding back on luxury item purchases or saving up for things rather than just impulse buying on credit.
2. Be honest on your application: Talk with a broker about your application and make sure you’re honest and upfront from the very beginning. A broker will be able to identify in advance which lenders are going to look more favourably at your specific financial situation.
3. Take steps to improve your credit history: This is a really easy but very important step. Focus on paying all of your bills on time so that you can build up a good credit score. Two years of good credit is enough for most banks to decide that you are a great candidate for a mortgage.
4. Demonstrate you’re responsible with money: If you don’t currently have a credit score then you’ll need to think about other ways you can prove you’re responsible with money. Talk to a broker about what evidence will be accepted by lenders (for example, a rental ledger showing all payments made on time).
5. Seek advice about applying with a criminal record: A criminal record doesn’t always last forever (depending on the case and state). In some instances, it may be worth holding off slightly on your application. But the best thing to do is talk to a broker for some expert advice before applying.
6. Be conscious of your spending habits: Try to break the habit of using ‘buy now, pay later’ platforms (such as Afterpay) or requesting financial bailouts from others (i.e., your parents). Before making a purchase, think about how it will ultimately affect your loan application.
7. Try to stick with the one job: Most Australian lenders prefer for a borrower to have been employed for at least six months by the same employer. Try to stay at the one job for at least that long before applying for a mortgage.
8. Talk to a broker about low doc loans: If you’re employed casually/seasonally or you’re self-employed, then talk to your broker about what kind of loan will be best for your current circumstances. A low doc loan may make it easier for you to gain finance without having to show consistent wages.
9. Get on top of your taxes: Lenders will normally want to check your past couple of years of tax records, so if you’re behind on your taxes, then try to get everything lodged ASAP.
10. Get a realistic assessment of your borrowing potential: Don’t just rely on personal estimates or the advice of well-meaning friends or family. Talk to an experienced mortgage broker for an accurate assessment of how much you can expect to borrow.
How to Avoid Mortgage Application Denial: Make an Appointment with a Broker
Now that you understand the main reasons for mortgage rejection, you’re ready to get started. If you’ve been worrying why would a mortgage lender decline your application, then contact the North Brisbane Home Loan team of professional mortgage brokers in Brisbane. We can give you an honest assessment of your circumstances and help you successfully identify any potential reasons for mortgage rejection. Our friendly staff can then provide tailored advice on how you can work to overcome these issues.
Get in touch today to find out more about how to avoid mortgage application denial.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
