How to Avoid Getting Your Loan Application Declined

One of the most frustrating things that could happen to you while purchasing your new home is having your loan application declined.

By the time you have submitted your application, you’ve likely been to dozens of open homes, considered a wide-range of lenders, organised all your paperwork and potentially even put an offer in on a house. Your application failing at the last hurdle is not only frustrating, but it can also be demoralising, making you feel like your dreams are over.

But they don’t have to be, and more importantly, there are a few things you can do to make sure your loan application doesn’t get declined. Below we go in to detail about the things you should consider before applying for your loan.

Loan to Value Ratio (LVR)

The more you’re looking to borrow from a lender, the more risk it presents to them. If you want to borrow more than 95% of the value of the property, that can be a red flag for a lender.

Most banks like to see you come up with a 20% deposit, which means an 80% LVR. As this may not always be possible, there are other options you can consider, such as paying Lenders Mortgage Insurance (LMI) or going with lender that you may not have originally considered.

If you do need to borrow with a higher LVR, however want to avoid LMI you might want to look at a guarantor loan or even taking advantage of a Government program such as the First Home Loan Deposit Scheme.

Stable Employment

In a lenders perfect world, all their loan customers have been in long-term stable jobs with a a great paycheck. Unfortunately, in reality, things are not always that straight forward. Many people have very unique work situations. If you’re self-employed or haven’t been in your current job for at least six months, then lenders may not look favourably on your application. Fortunately, there are lenders that understand your situation and therefore it is important that you work with a mortgage broker who can match your employment situation with the right lender.

If however you’re unemployed, you’re going to have a very tough time getting finance of any kind. This is true, even if you’re asset rich, as you need to demonstrate how you intend to service the loan.

Credit History

Having bad credit is often a red flag to a lender and it is not always one that is easy to overcome. If there is an error that has been made on your credit file, then that is something you can sort out. However, if you’ve been bankrupt in the past, you might need to work with a specialist lender.

Spending Habits

Banks and lenders like to see that you’re able to manage money effectively. If you’re spending habits aren’t great, then that’s likely a sign that you might not be able to manage a mortgage, and lenders are less likely to approve a loan. Putting together a few months where you keep your spending habits under control is important. But it’s also more important to not have a host of debts that need paying each month, such as car loans or personal loans. Lenders don’t look favourably on these types of costs as they are fixed costs, unlike your discretionary spending.

Buying an Unusual Property

If you’re looking to buy a property that might be tricky to sell in the future, you may not receive the property evaluation that you expect, meaning your LVR may not be where it needs to be. Types of properties that fall in to this category include holiday homes or rural blocks of land. Banks will always consider how much they will be able to recoup by selling the property in a worst-case scenario, and always prefer properties they are able to sell quickly and easily.

Get Pre-Approved

To avoid getting into a situation where you might get declined, it’s vital that you go and speak to a mortgage broker before you even start looking for properties. That way, they’ll be able to assess your personal situation and also give you some guidance around the types of properties you’re going to be able to afford.