Having your mortgage application declined isn’t necessarily the end of the road when it comes to your home buying journey. There are a few reasons why your lender may turn you down and understanding what these are is the key to your success. Here are 4 of the most common reasons why lenders may decline a mortgage application.
1. Not enough deposit
Probably the biggest deterrent for new home buyers is having to save a 20 per cent deposit of the purchase price, particularly in Auckland where the median house price reached $870,000 in December 2017 according to REINZ.
While the benefits of a larger deposit mean less risk for both purchaser and lender, the reality is that many first home buyers are cut out of the property market because of these strict lending requirements.
In addition to having a 20 per cent deposit, lenders also pay careful attention to the quality of the deposit, preferring to see some form of genuine savings rather than a gift from family members or a personal loan. This is why regularly contributing towards KiwiSaver is so important, as lenders regard KiwiSaver as a genuine savings.
2. Not enough income
The Responsible Lending Code requires that lenders ensure home buyers have sufficient income to meet their everyday living expenses while making mortgage repayments. Lenders do this by calculating your debt to income ratio: How much you earn compared with how much you pay out each month.
If your debt to income ratio is too high – typically exceeding 40 per cent – your application will likely be declined as it means you may be unable to meet your mortgage repayments should interest rates rise. You can read more about debt to income ratios here.
Your best bet in this case would be to look for a more affordable property, pay down all of your short-term debt, or look at ways to increase your income.
3. Bad credit history
Your credit history is an important factor in determining whether or not your home loan application is approved. Your credit history or credit rating is a record of all of your financial dealings over time including hire purchases, credit cards and personal loan applications – both approved and declined.
It will also show any late payments or missed payments as well as amounts still owing. It’s worthwhile doing an online check of your credit history to ensure there are no errors in your records. For those with a bad credit history, there may still be lending options as some non-bank lenders will lend to those with bad credit, albeit at a slightly higher interest rate.
4. No proof of income
If you’re self-employed or have an irregular income as a contractor or part time worker, it may be difficult to prove your income. Your lender needs to know that you earn enough to meet your mortgage repayments and be able to calculate your debt to income ratio. Again, there may be a solution with a non-bank lender so it’s worthwhile talking to your mortgage adviser about your options in this case.
More lending options
Mortgage Express partners with a number of bank and non-bank lenders which means we have access to a much wider variety of financial options. If you don’t meet all the tick box requirements with one lender, we’ll shop around on your behalf to find a deal that better fits your situation. Get in touch with one of our advisers today to find out more.
While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Mortgage Express Limited for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication.
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