Most people believe a good life is having that killer home and a stable job. But what happens when you try to apply for a loan and get rejected? It can become increasingly disheartening to hear the same 9 words – “we are sorry your loan application was denied.” In this article, we dig deep and reveal the reasons why your home loan was denied.
Understanding the reason behind your loan denial is a valuable learning experience. This reason helps you to pinpoint the areas of your financial life that need to be polished. You can always improve on this and reapply for the funding.
Let’s dive right into the ten reasons why your home loan was denied
1. Poor Credit History
Credit history is simply a record of a borrower on debt repayment from several sources, including banks, collection agencies, or credit card companies. Potential creditors such as the Australian Lending Centre and other mortgage lenders use your credit report or information to decide whether they will give or deny you a loan. Your credit information is the right way for lenders to tell whether you are a risky investment or not. Having a poor credit history will deny you a home loan.
If you check your credit score and you find that you have defaults, blackmarks or court judgments, it is highly recommended that you remove these otherwise you will struggle to secure funding. There are specialised credit repair agencies that can assess your credit situation and work towards removing these negative listings.
2. Insufficient Income/Asset Documentation
One of the big reasons why your home loan application may be denied is due to your income or debt ratio. Your income is an excellent measure of whether you can or cannot afford the home. ALC is likely to enquire about your assets and, more specifically, your liquid assets. They’ll want to identify what you have saved to raise a down payment, pay closing costs, and make monthly loan payments once you close your loan.
You have to make sure that you have sufficient income or assets before you apply for a home loan. It is essential to have your resources in a certified account, at least two months earlier, to applying for a home loan. It is because banks and lenders regularly ask for your two latest bank statements. Also, make sure you verify your assets for a down payment, closing costs, and reserves.
3. Down Payment is Too Low
Typically when you buy expensive things on credit, you need to make a down payment. The down payment amount usually covers a portion of the market price of the home. Lenders look at the upfront amount as an investment in their future home. A low upfront may not put their minds at ease. To certify your home loan application, consider having a more significant down payment, or else your home loan will be declined.
4. Problems with the Property
Sometimes you are not the cause of a home loan denial. It is not always your fault. Your home loan denial may be due to problems with the property you want to purchase. Therefore before you apply a loan for a particular home, do thorough investigation and research about the property.
5. Inadequate Employment History
Your employment history is essential when it comes to a home loan approval. You should have a consistent job history when applying for a mortgage home loan. Most lenders will consider two years of steady employment history to process your loan. By doing so, they only want to be assured that you can hold on to a job long enough to repay the debt. Make sure to keep all your payslips and any tax information. You will want to make the process as easy as possible for lenders.
6. Inaccurate documentation
Home loan lenders want to know everything about you, and therefore, leaving out any information may raise the alarm. It is always good to provide all the required details and fill out all the sections on application forms.
7. Reduced Debt to Income (DTI) Ratio
Most lenders look at DTI Ratio before awarding a home loan. DTI Ratio is simply a sum of your monthly payments divided by your monthly income multiplied by 100%. You should always aim at 45% and below.
8. Unpaid Taxes
Taxes are significant to a country’s income. A due fee is another debt that can haunt you. It can lead to a robust rejection of your home loan application. Make sure to work through old debts before applying for a home loan.
9. You Asked for an extremely small Loan
Most lenders give loans based on how much interest they will make. The lower the investment, the lower the benefit they will gain. Therefore, you should understand that lenders make money from interests that are higher on high loans than small loans.
They factor their profit against their risk, so it is unlikely for them to approve a low loan request.
10. Bulky transactions
Just like receiving huge money, large transactions may raise red flags when applying for a loan. You should not make large transactions as you near a home loan application period.
Stick to low operations and always be ready to explain the purpose of the transactions. Valid documents should accompany this.
Final Thoughts
Now that you have learned and you are well aware of the reasons that can lead to your home loan denial, you only need to rectify what is dragging you behind. Make sure that all the above are taken care of before requesting a home loan, or else it can get rejected. If your loan is denied, remember it is not the end. Focus on building positive financial habits that will help you increase the likelihood of securing a loan.
