When you apply for a home loan, lenders will look at many factors before deciding whether to approve your application or not – and if you don’t “pass the test” for any one of these they are quite likely to turn you down.
“This is why it is so important for prospective borrowers to make sure their finances and credit records are all in order before they apply for a loan – and before they even start looking for properties to buy,” says Shaun Rademeyer, CEO of BetterLife Home Loans.
Some reasons your home loan application could be turned down, he says, include the following:
- Too much debt and too little income. In terms of the National Credit Act, lenders such as banks have a legal obligation to ensure that the consumer will not become “over-indebted” by any loan they may grant. In other words, if your current debt installments and other monthly obligations already take up most of your after-tax income, it is unlikely that you could afford to make the repayments on a home loan, and most banks will turn you down.
- Poor track record of debt repayment. You may never have defaulted on a loan or even missed a car installment, but if you habitually pay your bills late, that will show up on your credit record and make you look like a bad risk. This applies to credit card and store card installments, car repayments, your rent and even your cell phone bill, so you need to be meticulous about paying on time, for at least two years before you apply for a home loan. And of course if you do have any debt judgments against you, you will also need to resolve these before applying for a loan.
- Unstable employment history. Lenders like to see job and income stability, preferably for at least two to three years before you apply for a home loan. This can make it more difficult for self-employed people to obtain a loan unless they have kept meticulous records of their income and expenditure. In rare cases the lender might have doubts about the future of the company that employs you, and turn you down on those grounds.
- Not enough cash in the bank. Lenders are very seldom willing to grant loans for 100% of the property purchase price anymore, and prospective buyers need to have a sizeable amount of cash available to pay a deposit – either in savings or as equity from the sale of an existing property. Lenders will also want to know that you have enough cash available to cover the transaction costs, such as transfer duty, legal fees and bond registration fees.
- Not enough value in the property. Before a bank approves your home loan application, it will send an evaluator to assess the value of the property which is going to provide the security for your loan. And if the value does not support the price you have offered or the loan you have requested, the application will be rejected.
- Other people’s problems. Sometimes borrowers can be turned down for things they didn’t do themselves. For example, if you stood surety for someone and they defaulted on their debt repayments, it will also reflect badly on your credit record. Similarly, if you have a clean credit record but your partner or co-applicant does not, your application could be turned down.
- Previous rejections. When a loan application is turned down that is also reflected on your credit history, and other lenders will be disinclined to approve it unless you first make some changes – like paying off more debt or creating a track-record of paying your accounts on time and in full every month.
Rademeyer says the best plan for those who are not sure if their loan application is likely to be approved is to ask a reputable bond originator to help them get pre-approval. “That way, they will be able to identify and clear up any potential problems before they start house-hunting – and they will know what they can afford to spend.”