There is nothing worse than dreaming of your own property, taking time and efforts into applying for your home loan, but only to have your lender come back and decline your application. It can be heart-breaking.

If your lender has declined your home loan application, you may be wondering why your application was denied, and what next steps you can take right now and in the future, so that you can get your mortgage application back on track and prevent it from happening again.

If you haven’t applied for a home loan yet, understanding the reasons behind a home loan disapproval can help you get prepared before you submit your application, so that you can get the best chance of approval.

Here are the top 5 reasons that your lender can decline your home loan application:

Video Timeline:

1. Poor credit history and character 00:31

2. Your income and expenses 03:28

3. Bank policy and appetite 06:12

4. Your situation changes 08:18

5. Other reasons 08:52

1. Poor credit history and character

1.1 Poor credit history

Your credit report plays a crucial role in the process of home loan application. Lenders use credit history to assess how reliable you are as a borrower. A bad credit history means you pose more risk to your lender.

If there are records in your credit history, such as defaults or bankruptcy, which will be counted when your lender assesses your loan application. However, sometimes your situation may not be as serious as bankruptcy, such as:

• You forget to pay your bills

For example, you move into a new house, and you forget to change your billing address, so you don’t receive the bills that are supposed to be mailed to your new home. As a result, there will be a default in your credit history as you don’t pay your bills. Even though you pay off all your owned bills later, the default will stay in your history for several years.

• Unarranged overdraft

Many New Zealand bank accounts allow you to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal. From a lender’s perspective, unarranged overdrafts indicate your financial situation is insufficient to support your expenses, which will affect your home loan application.

1.2 Your character

The character relates to the borrowers’ reputation and integrity.

When you apply for a home loan, you need to declare your existing loans including your revolving credit, regardless if you use it or not. If you do not declare all your existing loans to your lender, your lender may think you’re not honest, which might result in declining your home loan application.

Here is the example of not declaring your existing loans:

You haven’t declared your revolving facility to your current lender yet. You may think it’s unnecessary to declare because you’re not using it now.

2. Your income and expenses

If you’re salaried, your situation is quite straightforward – you provide evidence of your income, such as your payslip. However, if you are not a salaried employee, from the lenders’ perspective, sometimes your income may be less than you think due to its fluctuating in some following situation:

2.1 Unsteady or irregular Income

• Wages

There are different ways to be paid when employed. Wages is payment based on the time worked, and is usually payment per hour. If your workweek is fluctuating, and your work hours vary from week to week, then your lender might take the average or the minimum value as your weekly pay.

• Commission

A commission is when an employee is paid based on sales they have made or other targets they have met, for example, a percentage of the total value of a sale made. If your commission is unsteady, your lender might not consider adding all your commission to your income.

• Fixed term or casual

A fixed-term employee’s employment will end on a specified date or when a particular event occurs. A casual employee has no guaranteed hours of work, no regular pattern of work, and no ongoing expectation of employment. If this is your case, in the views of lenders, your income is unsteady or irregular.

• Self-employed

If you are self-employed, including independent contractor, some lenders may consider your latest one-year financial statements while other lenders may prefer two-year or three-year financial statements.

In addition, some lenders will not add back some non-cash expense items, such as depreciation, home office, expenses, your wages/salaries, which varies from one lender to the other.

2.2 Expenses

When lenders calculate your living expenses, they will view your bank statements in the past few months. For some first-home buyers, as they don’t have loan repayment commitment before, they’re more likely to spend most of their income weekly. If this is your case, your past expenses indicate how much you will spend in the future because your lender believes your future expenses often follow your past behaviour.

If your bank transactions show too much spending, it will have a negative impact on how much you can borrow. Your lender might reduce your borrowing capacity or even decline your home loan application.

3. Bank policy and appetite

3.1 Bank policy

Karen, one of our clients, planned to buy her first home. Her deposit was lower than the preferred percentage (20%), which made it a high LVR loan. We helped the client apply for a high LVR loan from a New Zealand bank.

The bank could have offered up to 90% on high LVR loan. However, the bank changed their lending policy with short notice and took effect quickly, then this type of loan would only be available for their existing customers. They define a current customer as someone who already has their job income credited to their bank account for at least three months.

In most of the occasions when lenders send us an email to announce a lending policy change, they often send it after 5 pm in the working days, which leaves no time for you to continue applying old policy.

3.2 Bank appetite

Let’s have a look at another example of a high LVR loan.

Some New Zealand first-home buyers might find it hard to get a low deposit home loan approval from their banks. It’s not impossible, just very hard. Many New Zealand banks have their own rules on high LVR loan application.

If your deposit is lower than the preferred percentage, most lenders will consider it too risky. So, they will scrutinise your home loan application. It’s unfavourable for you if you have credit issues, unsteady income, personal loans, etc., then they may choose not to lend money to you.

4. Your situation changes

When you want to kick-start your property buying process, a loan pre-approval will get you on your way faster. Getting a pre-approval can boost your confidence going into auctions as it will give you an idea about your borrowing capacity.

However, should your circumstances change in the period of the pre-approval, such as you change jobs, you have a newly born baby, your loan application will need to be reassessed. In other words, your situation changes may affect your loan application approval outcome.

5. Other reasons

When you or your mortgage broker help you apply for a home loan, they need to write to your lenders about your situations. If your mortgage brokers don’t explain your story well regarding any concern that your lender might have, such as why your income increase from $40k to $80k annually, your lender may decline your application directly.

We highly recommend you engage a professional mortgage broker like us. We understand the application criteria for different lenders, and we can negotiate on your behalf. We are more likely to get a better outcome than if you go directly. 

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action. 

Prosperity Finance – here to help

Prosperity Finance looks at your loans strategically, empowering you to make the best long-term, informed decisions. We are professional mortgage brokers and are here to help. Give us a call today on 09 930 8999. 

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