September 8, 2017 Laura Osti2 mins

You’ve worked your butt off to put away some money, paid off your credit cards, and have a spick rental history. You’ve got your eye on the prize: you’re ready to buy a house. Give yourself the best chance of securing a home loan by making sure you understand the top three reasons home loans are knocked back by lenders.

 

1. Not enough deposit.

This is one of the top reasons customers aren’t able to get a home loan.  Generally, you’ll need to have a minimum 20% deposit if you’re looking to purchase a property, or 20% equity in your property if you’re looking to refinance your existing home loan.

Some lenders (Tic:Toc included) will accept less than a 20% deposit by offering a low deposit home loan with Lenders' Mortgage Insurance (LMI). Because of the increased risk of having a higher loan to property value ratio (a bigger loan against your property), lenders need to pay insurance to protect them in case you can't repay your home loan. This cost is added onto your home loan amount, so you don't need to pay it upfront. Although there is an added cost, using LMI to get a low deposit home loan can allow you to buy a home sooner if you don't want to wait to save a bigger deposit.

Analysing your current spending, setting a budget and getting on top of your debts are some great steps to help you save towards your deposit.

 

2. Bad credit history.

Unpaid debt of any kind will generally show up on your credit history (not paying your mobile phone bill can come back to haunt you!). Some lenders are more lenient when it comes to poor credit than others, but generally speaking, unpaid defaults are never good.  It’s worse if you try and hide bad debt because it is going to get found and then you’ll definitely get knocked back.

There are some things you can do to improve your credit file if it’s caused you problems when applying for credit. You can ‘clean up’ your file, by updating any incorrect information, or adding a correction notice to explain any special circumstances.

You can check out what you look like on paper before you apply for a home loan by obtaining a copy of your credit report from places like www.mycreditfile.com.au and www.checkyourcredit.com.au.


3. Inability to comfortably make repayments.

Lenders call this meeting serviceability requirements.  Home loan customers need to be able to show that they can comfortably meet the loan repayments, especially in the event of an interest rate rise. 

Interest rate buffers are applied to make sure you can meet the loan repayments at a higher rate, (not just the hot rate of 3.68%).  If you can’t meet the repayments at the higher interest rate (as high as 7.5%), your loan will get knocked back because the lender needs to know you can still meet your repayments if circumstances change.

Lenders will also check whether you have employment continuity, and reliable and consistent income. Applying for a home loan when you have have a non-standard employment type or work history, may require a little more work. But it’s doable!

 

Find out more about how to get a home loan if you’re self employed.