5 Surprising Reasons for Home Loan Heartbreak
There are many reasons why your home loan application could be rejected, and some can come back as a big shock. Here are five surprising reasons to help avoid home loan heartbreak.
There are few words would-be home buyers dread more than “your home loan application has been rejected.” It can feel like a real kick in the guts, and some of the reasons can be surprising.
A rejected loan application can hold up your home-buying plans and could have a negative effect on your credit score. So, it can be important to avoid this scenario.
Why Your Next Application Might Be Rejected
Spending Too Much or Too Little
Most people know that spending too much is a big red flag for lenders, so limiting your unnecessary expenses is important. But drastically slashing costs and living a very meagre existence can also be a concern.
Lenders can see this as unrealistic and unsustainable, and they can remedy it during assessment by applying the household expenditure measure (HEM) instead.
HEM is a standardised benchmark used to estimate annual living expenses. If your standard, reasonable budget is on the super savvy frugal side, there is a chance that HEM may be higher.
Having multiple credit cards and performing several balance transfers can affect your application. Every time that you apply for a credit card, it is logged on your credit history. And lenders will likely take notice.
Even your “just in case” credit card can have an impact. You may need to prove you have the means to pay off the limit within three years, even if the balance is $0.
Buy Now Pay Later (BNPL) Services
The Australian Prudential Regulation Authority (APRA) amended its framework this year to include BNPL debts in the reporting of debt-to-income (DTI) ratios.
Lenders will likely include BNPL debt in your DTI ratio to see your total debt in relation to your income. And a high DTI can result in limited borrowing capacity or even rejection.
Your credit history is a finicky thing. Even a few late payments can cause your credit score to drop. So, it is important to make sure your bills are paid on time.
Also, applying for too many credit cards or other loans can impact your credit score, and therefore your home loan application. And with increasing news of scams, data breaches, and identity theft… it’s a good idea to check your credit history health.
You can request a free credit report once a year from one of three national credit reporting bodies which are listed on this government website.
Your Type of Income
Your type of income could make or break your application. Lenders typically favour traditionally employed applicants with a steady and reliable income.
Many lenders consider self-employment carries a greater risk for less consistent income, and some can reject applications on these grounds. So, if you are self-employed, when applying for a home loan it is important to target lenders who are more open to lending to small business owners (we can give you the down-low on this).
Also, it seems that tax debt is increasingly becoming an issue for self-employed applicants. So, if you have a large tax debt, it might be worth getting on top of that if you can.
Frequently Asked Questions
What Are Some Surprising Reasons for Home Loan Rejection?
The article lists five surprising reasons for home loan rejection, including spending habits, credit card usage, BNPL services, credit history, and the type of income you have.
How Can Spending Habits Affect My Home Loan Application?
Both excessive spending and drastically cutting down on expenses can raise red flags for lenders. Lenders may use the Household Expenditure Measure (HEM) to assess your living expenses, which could differ from your own budgeting.
How Do Credit Cards Impact My Home Loan Application?
Having multiple credit cards and performing several balance transfers can negatively affect your application. Lenders may require you to prove that you can pay off the credit card limit within three years, even if the balance is $0.
How Do Buy Now Pay Later Services Affect My Loan Application?
The Australian Prudential Regulation Authority (APRA) has amended its framework to include BNPL debts in the reporting of debt-to-income (DTI) ratios. A high DTI ratio can limit your borrowing capacity or even result in loan rejection.
How Does My Type of Income Affect My Home Loan Application?
Lenders generally favor traditionally employed applicants with a steady income. Self-employed individuals may face challenges, as some lenders consider them a greater risk. It’s important to target lenders who are more open to lending to small business owners.
How Can I Check My Credit History?
You can request a free credit report once a year from one of the three national credit reporting bodies listed on the Australian government website.
Get in touch
We’d love to have a chat about your home-buying dreams to see if we can match you with the right loan and lender for you.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.