Fortunately, your dream of finally owning your own home doesn’t have to die a bitter death. These are the top reasons home loans are denied and what you should do to avoid them.
The ability to service the loan is an assessment by banks.
Your capacity to service the loan isn’t about whether your income can cover your home loan, but about whether your lifestyle and personal expenses make repayments feasible. While you can promise to give up luxuries like buying DVDs and going to the salon every fortnight, such deprivations aren’t always realistic. Banks will take into account your lifestyle and personal expenses when considering your loan application.
“It is really that balance of [the borrower] maintaining their lifestyle — the cost of that, their income, and then whatever they have left to service the loan,” said Patrick Nolan, Head of Home Loans at ME Bank.
“How much of your income are you using to maintain your lifestyle per week? These expenses are added to your income. Then in addition to that we look at how much you can afford to service that loan and those repayments.”
Banks also require proof of savings. This is particularly important for younger Aussies who rely on their parents for deposit assistance.
Even if parents gift their children with cash to help them onto the property ladder, that doesn’t guarantee the loan will be approved. The borrower must show that they can afford the mortgage and are capable of paying the monthly payments on their own.
Banks will verify your credit history.
Your credit history will be tainted and your bank won’t approve the loan. Your credit history will be reviewed by banks. Your external and internal credit histories will be examined by the bank. This is your credit history with banks (credit defaults, loans), and your external credit history (credit history outside of banks) refers.
“There is a lot of data and a lot of science behind this that…illustrates that your previous history is usually a very strong indicator of how you will perform going forward,” Nolan said.
While the state of your credit history is clearly important, the good news is that an adverse credit history isn’t the end of the world. It doesn’t matter how bad your credit score is, you can still get a loan. This includes being aware of your credit score and what’s on your file and being proactive about it.
“The real opportunity for a customer if they have had a ‘black mark’ is to establish and be able to demonstrate a really good savings pattern,” Nolan said. “And then, in that situation, to be able to explain to the bank why that event occurred, which meant you weren’t able to pay off that loan or that debt owed and to illustrate what has changed between now and then.”
Banks determine if you’re a wise investment.
Banks aren’t major risk takers. Hence, if they don’t think you’re a wise investment, they’ll either deny your loan or make it difficult for you to borrow. Just as importantly, where you want to buy and what type of property you’d like to buy could affect your chances of being approved.
One prime example is apartments in inner-city neighborhoods. Oversupply is a concern.
“There has been a bit of a boom in the building of [apartments], particularly in Melbourne, Sydney and Brisbane,” Nolan said. “A lot of the banks now in the CBD area want to understand who built the developments, what it looks like and how many apartments are in there so they can get a handle of what that looks like.”