Within everyone applying for a mortgage a small gremlin of fear resides. You can have read all the blogs, attended as many seminars as physically possible and yet when the time comes, there's still a sliver of doubt around your application and that sinking feeling around the question 'what if I get rejected?'
It's a fear-inducing experience. You bare your financial soul to the lender and you hope to meet their exacting expectations. But what if?
What if that night in town makes you look like a party animal that would rather hit the city than save for a mortgage payment?
What if that time you went overdrawn two years ago is flagged by the bank's system and your application is sent to the shredder?
What if you have the deposit, and a good job, but your student loan places you on some sort of 'do not lend' list?
In this blog article we'll cover some of the most common reasons people's applications are rejected, and what you can do about it.
1 - Not enough deposit
We're getting this one out of the way early because, even though it is a reason, it's not always the main reason. In New Zealand most applicants typically require a 20% deposit for their home, but banks are still allowed to lend to people with less than 20% and even less than 10% deposits.
This means that even though not having enough deposit is a common reason, it's not always the only reason. Chances are that you'll be rejected based on a lower deposit if there are a few other red flags present.
If you are accepted for a mortgage with less than 20% deposit you can expect to face a slightly higher interest rate than the best advertised. To avoid this as a rejection your safest bet is to have the full 20% deposit available. This will not only give the banks one less reason to reject your mortgage but it can put you in line for some of the best mortgage rates available.
SMM top tip - don't feel like you can't speak to a mortgage broker if you don't have 20% deposit yet. They can assess your situation and see if you could be eligible for the lower deposit requirement now, or help you design a savings plan to get there faster!
2 - Income
If your income is too low to service the mortgage then a bank is highly unlikely to lend you the money to buy a home. This is a major reason why many loans are rejected as, even with the right deposit, if you can't afford to repay the loan itself a bank will certainly not lend to you.
To ensure their loan is going to be paid back regularly the bank will look at your income as one part of the factors affecting your ability to service the loan. If you have a good income, or a joint income that is favourable then the bank is more likely to lend you a mortgage than if your income/s are low and each payment will be a struggle.
You can play around with various mortgage calculators to see what the monthly repayments are likely to be and see what you can afford.
SMM top tip - interest rates on mortgages can go up and down if you're not in a fixed term period, which means you'll also need to be able to afford a 1% or 2% increase in the interest rate if the worst occurs.
3 - Affordability
It's not as simple as having a good income and focusing on that when it comes to your ability to afford a mortgage on a new home.
The banks will look at any and all evidence that you've managed to afford a similar amount to your mortgage repayments in the past. This may mean looking at rent, savings or credit card payments. Basically, have you demonstrated an ability to manage your money so that you can pay all of the things you need to pay and still have a little bit of padding left over?
If you're living with your parents to get some cheap rent while you save for a deposit you may be making a rod for your own back if the payments are very low. The bank will want to see that you can manage your outgoings effectively so, instead, ask the person you're living with to charge you a more realistic rent and agree that the extra goes into a savings account that you get back at the end. This will help you manage a realistic monthly budget while also helping you with a deposit when it comes to buying.
4 - Being self-employed
Again, on its own and in the right circumstances this could actually work in your favour but it's also a very common reason why many applications are rejected.
If you are self-employed and haven't been operating for 2-3 years then you may need further investigation; you simply don't have the track record of income to give the bank the confidence it needs that you'll be earning enough to service the loan.
On the flip side, if you have been in business for more than 3 years and you have a good track record of making a net profit and surplus the bank will look far more favourably on you. It also pays to put all income through the books, as taking regular 'cash jobs' will ultimately show a lower level of business income..
SMM top tip - Seek advice from a lawyer or accountant on the implications of having your business and your home tied together. It could mean that, if your business goes under then your home is potentially at risk.
5 - The house
Some mortgages are rejected not because of the applicant, but because of the home that is being bought.
Part of the mortgage application process includes an independent valuation of the property to ensure that, if you stop paying your mortgage, the bank can repossess the house as a last resort and sell it to recoup the loan they've given you.
If the property has any major issues affecting the value, the bank may reject the mortgage because it fears it might not be able to recover the outstanding loan amount if it has to sell the property to recover the loan. If it turns out that you've offered way more than the property is actually worth then the bank may see that as a risky loan and could pull the mortgage application even if you could afford the payments.
Other factors that a lender may deem unattractive might include properties that are thought to be 'leaky' or prone to flooding; needing major renovations to make them safe/habitable; located in remote or rural areas; or even where the address might have negative connotations (ie: next door to a gang house!). Remember, the bank doesn't have to lend you money and they have every right to be choosey.
Avoiding this one comes from doing your research on the property's current and potential value. Use websites such as QV and TradeMe's Property Insights to get a sense of what the property may be valued at.
6 - Poor/no credit history
You manage your money really well and have never had a loan or a credit card; so how could this be a negative?
A mortgage is a very large loan and if the bank can see that you can take on smaller loans and make repayments on them then this is a good thing. It also contributes to your credit score, which is kind of like a lending profile of a person. It quickly identifies whether you repay on time, default on payments or have any loans with outstanding payments. This score gives the bank a quick snapshot of the type of borrower you are. A common mantra in financial circles is that a borrower's previous history is a great predictor of future behaviour !
Most people would have little insight into what their own credit ratings are, and we encourage potential borrowers to check this out well ahead of applying for a mortgage - nobody likes surprises!
A non-existent score makes it harder for the bank to tell that you can be relied upon to repay a loan. It may seem unusual, and it certainly won't be the only reason you're rejected, but having a healthy credit score gives lenders confidence that you can manage borrowed money well.
7 - Other debt
The flip side of point 6 is that it's also possible to have too much debt or the wrong kinds of debt. If you've recently borrowed money to buy a new car or maxed out your credit card for a holiday, then the bank may look at your other borrowing obligations and wonder whether their repayments will be at risk if those creditors come calling early.
Having a student loan, or a credit card with a balance on it might not be a deal breaker but you definitely want to ensure you're not taking on too much debt. It can also look quite bad if you're using payday or short-term lending companies. These debts are often very high interest and can also allude to a poor habit of money management.
8 - You've borrowed the deposit
Money appearing at random can raise some red flags at the bank. The lender may look at that and wonder where it's come from and what strings might be attached to it. Relatives are able to make cash gifts (always worth talking to an accountant before accepting these sorts of gifts) but this doesn't always mean an immediate tick in the bank's approval box.
The bank would like to see that you can work towards saving when you need to. That's because the padding of having disposable income that can go into savings shows them a couple of important things:
- That you could afford an increase in repayments if interest rates go up..
- That you can budget effectively.
- That you can resist the temptation of spending a deposit !
Therefore it's always better for you to try to get as much of the deposit as possible under your own steam. If you need a relative to make up the difference on a deposit then you could always ask them to be a potential guarantor as an alternative option.
9 - Your guarantor lets you down
Having a friend or relative act as a guarantor can sometimes enable them to allocate the equity they have in their own property (they must be a homeowner) as part of your deposit. This is often how parents help their kids get into a first home.
This can come with a few strings attached from the bank's perspective. For example they may insist that your guarantor switches banks to them if they aren't with that bank already, as this effectively gives the lender two mortgages to rely upon. They will also need to prove that they have the equity available to cover the balance of your deposit. If they don't have the equity required to cover your deposit the bank will refuse your application.
Your guarantor may not be willing to switch banks either, so your application may be rejected based on the person you're relying on to back your mortgage application. The best way to avoid having your mortgage rejected for this reason is to ensure you have the required deposit in cash, based off your own efforts of saving if possible.
10 - None of the above
There are dozens of reasons why a mortgage application might be rejected. Whereas we've tried to cover off some of the main ones, there's a tonne of other reasons why your application might not get the tick of approval.
The good news is that a rejection from one bank might be the first step towards an approval from another bank. Not all banks have the same requirements, and some may be in a position to take on riskier applications than others. They all have different lending policies, funding lines and risk appetites at any point in time!
That's why it's always a good idea to speak to an independent mortgage advisor. At Stephanie Murray Mortgages we look at your application and go to various banks and non-bank lenders that are in the best position to assess your loan application. We go to a number of lenders on your behalf - so don't feel too despondent if you've been rejected for a loan.
If you aren't in a position to buy then meeting with a mortgage broker can still be useful as we'll give you tips and advice on what you might need to do to have a stronger application in the future.
To discuss your options book a chat with one of our friendly advisors today. Did we mention our services are completely FREE ?