Buying a new home is undoubtedly one of the most exciting times in our lives. But, on the other hand, a mortgage application can be a stressful process as you dive into a world of unknowns.
Let’s look at five factors that may negatively affect your chance of being approved for a home loan.
Lying on your application
Lying about your financial situation is a big no-no in the eyes of any bank. For example, not disclosing childcare costs or disclosing only one credit card, when in fact you have three, can add a red flag to your application.
Lenders share information to prevent fraud, which can also affect any future applications.
High debt to income ratio
Lenders will compare your income level against any outstanding loans, including the loan you are applying for. It helps them measure your ability to repay the loan without putting you under financial stress.
For example, a couple earns $200,000 combined. They have a $20,000 car loan, $5000 credit card limit, and are applying for a $700,000 home loan. Their debt to income ratio is 3.62 ($725,000 divided by $200,000). Although it differs for every lender, generally, a debt to income ratio of more than 6 is considered risky.
Significant changes in your life
Lenders like to see stable employment with consistent income. If you have started a new job recently, it can reduce your chances of being approved.
Similarly, a significant expense close to your loan application date is not ideal either. For example, if you lease a new car or take out a loan on a new car, this can result in lenders rejecting your application.
Errors on the application paperwork
A loan application involves providing numerous documents and filling out loads of forms. Make an error in haste or provide documents that are inconsistent with your application, and it will attract additional scrutiny from lenders.
Buy now, pay later (BNPL) services
With BNPL services such as Afterpay and Zip becoming increasingly popular, banks are more cautious than ever when reviewing loan applications. This includes assessing your bank statements to ascertain if you use BNPL services.
A few factors to consider:
- Defaulting on your BNPL repayments can affect your credit score.
- Outstanding payments are considered financial commitments which can impact the amount you can borrow.
What if your loan application is rejected?
Understanding why your application was rejected is essential. Common reasons include a bad credit score, low deposit, or inability to service the loan.
You should avoid re-applying straightway after being rejected by a lender. Instead, take steps to set up a savings budget, extend your purchase timeline, or reduce existing debt.
Professional advice from a financial adviser or a mortgage broker can help to avoid another rejection.
Seek professional help to increase your chances of being approved
To improve your chances right from the beginning, consult a financial adviser who can help with budgeting, cash flow management and explaining the impact of a home loan on your overall financial goals.
When you are ready to apply for a loan, consider consulting a mortgage broker to guide you through the loan process. They can provide guidance around items lenders may flag, compare different lenders to get you the best deal, and apply for the loan on your behalf.
You need to consider with your financial planner (or adviser), your objectives, financial situation and your particular needs prior to making an investment decision. Sensibly Pty Ltd and its authorised representatives (or credit representatives) do not accept liability for any errors or omissions of information supplied on this website
Nick Shanley, Steve May, Luke Styles and Shanley Financial Planning T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Sensibly Pty Ltd, AFSL 533923. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guides.
