No one likes getting rejected
There are few words would-be home buyers dread more than: “your home loan application has been rejected”.
It can feel like a real kick in the guts. And some of the reasons can be surprising.
A rejected loan application can hold up your home-buying plans and could have a negative effect on your credit score. So it can be important to avoid this scenario.
Below we’ve outlined five reasons your next application could be rejected – so you can start heading them off now.
1. Spending too much or too little
Most people know that spending too much is a major red flag for lenders. So limiting your unnecessary expenses is important.
But drastically slashing costs and living a very meagre existence can also be a concern.
Lenders can see this as unrealistic and unsustainable, and they can remedy it during assessment by applying the household expenditure measure (HEM) instead.
HEM is a standardised benchmark used to estimate annual living expenses. And if your standard, reasonable budget is on the super savvy frugal side, there’s a chance HEM may be higher.
2. Credit cards
Having multiple credit cards and performing several balance transfers can affect your application.
Every time you apply for credit an inquiry is logged on your credit history. And lenders will likely take notice.
Even your “just in case” credit card can have an impact. You may need to prove you have the means to pay off the limit within three years, even if the balance is $0.
3. Buy now pay later services
‘Tis the season for shopping. And buy now pay later (BNPL) schemes will be rolling out the red carpet.
But it might be worth resisting the temptation.
The Australian Prudential Regulation Authority (APRA) amended its framework this year to include BNPL debts in the reporting of debt-to-income (DTI) ratios.
Lenders will likely include BNPL debt in your DTI ratio to see your total debt in relation to your income. And a high DTI can result in limited borrowing capacity or even rejection.
4. Credit history
Your credit history is a finicky thing.
Even a few late payments can cause your credit score to drop. So it’s important to make sure your bills are paid on time.
Also, applying for too many credit cards or other loans can impact your credit score, and therefore your home loan application.
And with increasing news of scams, data breaches, and identity theft … it’s a good idea to check your credit history health.
You can request a free credit report once a year from one of three national credit reporting bodies which are listed on this government website.
5. Your type of income
Your type of income could make or break your application.
Lenders typically favour traditionally employed applicants with a steady and reliable income.
Many lenders consider self-employment carries a greater risk for less consistent income, and some can reject applications on these grounds.
So if you’re self-employed, when applying for a home loan it’s important to target lenders who are more open to lending to small business owners (we can give you the down-low on this).
Also, word on the street is that tax debt is increasingly becoming an issue for self-employed applicants. So if you have a large tax debt, it might be worth getting on top of that if you can.
Get in touch
If you’re not the kind of person who likes being rejected, well, the good news is that we’re not the rejecting type.
We’d love to have a chat about your home-buying dreams to see if we can match you with the right loan and lender for you.
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