Mortgage application declined? Don’t despair

What to do when your bank says ‘no deal’ to your mortgage application.

It’s a defining moment in your life: you’ve decided to take a leap of faith and commit to what is the greatest single debt most of us will endure in our lifetime, a mortgage.

Time to pop the champagne, right? Wrong... You’ve just had your application rejected.

Why does this happen? And what can you do to avoid it happening to you?

There are two key factors by which you are measured by the banks to gauge eligibility for a home loan:

Your income: You have to show that your income is consistent and enough to cover the repayments with enough left for daily expenses. If you aren’t earning enough money to service the loan you are applying for, then make sure your expectations of what you can borrow are realistic and that you can actually afford the monthly repayments along side your other monthly expenses.

Your credit history: you will need a good credit rating to be accepted for a loan. Bad credit history will hinder your options considerably, or could exclude you from getting a loan full stop. Once you get a black mark against your name because of your bad credit history, it will remain there for the next five years. If you choose to go down the path of bankruptcy, you will be excluded from getting a loan for the next seven years. There are some lenders who cater to the bankruptcy market, but you will find they come with a heavily inflated interest rate.

What can you do to boost your chances of being approved next time you apply?

Pay your bills: Make paying bills easier for yourself by setting up direct debits. And pay on time so you avoid making late payments and falling behind. This point also includes paying fines and fees for e.g. parking fines by their due date, as anything that has to be handed over to a debt collection agency is not good for your credit history record. Many people do not intend to miss debt payments so if you move house a lot consider a post office box instead, or when you move house ensure to pay for a postage re-direction service for up to a year so you don't miss any annual bills from companies you've forgotten to update your address with.

Review your debt: Sometimes the reason you are missing out on being approved for a home loan is because you have too much debt on your credit cards or your credit card limit is too high. Our combined credit cards limit is a significant factor in the home loan approval process. This should be an easy fix if you have some savings or a regular salary. Just clear your credit card debts and reduce the credit limit of your cards, or cancel some of your credit cards altogether if you don’t use them.

Related: Six steps for closing a credit card

Understand where you went wrong: If you have been declined a loan in the past numerous times, other lenders will see this as a warning sign. Ask your lender why your loan was declined and understand what you need to change before applying again.

Book a face-to-face interview with a banking professional instead of applying online. This will give you a chance to get personal, explain your situation and discuss your options. If you choose to apply online and the machine sees the red flag, it’s essentially game over for your home loan application. When meeting with a lender in person, make it as easy as possible for them to process your application by providing up to date paperwork (such as most recent payslips, including income and overtime) and making sure that the documents match what you have claimed you earn on your initial application for the loan.

You might even have better luck applying through a professional mortgage broker who will submit your mortgage application to a lender who they know will take a higher risk and this will heighten your chances of approval.

Related: 10 questions to ask your mortgage broker

Take a break from applying: Repeatedly applying for a home loan more than once every six months makes it look like you may have problems and lending institutions will start to question why. Take a breather from applying, start putting extra income into the same savings account that contains your cash deposit, and go back to the bank in six months time. A larger deposit and increased savings history will improve your chances of mortgage approval. When you feel ready to give it another shot, apply again while keeping in mind that not all lenders are created equal and there will be a lender out there that is matched to your needs and your budget.

If you are young and still have a good credit rating ensure you keep it this way, as it will save a lot of pain down the track when you are trying to achieve financial independence. If you already have a bad credit rating, take the time to pay off all your bills and develop a good savings pattern, and remember to always talk to a potential lender in person.

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