Applying for a home loan is a time consuming process. So after going through all the stages of getting your financials organised, credit checks, and generally laying your financial soul bare to the lender, it can be heartbreaking when the answer is no. If this happens, it's important to make sure you understand why the lender said no, and if possible ask for suggestions on how you can remedy whatever the lender identified as the problem. There are lots of reasons why lenders say no, and depending on which reason applies to you, it may be possible to improve your chances of success next time around.



Low Appraisal Value

Part of the loan application process includes getting an appraisal done on the property. Basically, this means that the lender won't accept the price you paid for the property is accurate, and will only lend you money based on a lower price. This means that you'll only get a smaller loan, which may well mean you can't afford to buy the property without putting in a much bigger deposit.

There are a couple of possible solutions to this. One is, as I've already said, to put in a bigger deposit. Another is to go back to the seller and renegotiate the purchase price of the house, based on the appraisal you've received. It would be worthwhile confirming with the lender what price they would accept, in order for you to get the loan amount you need to complete the purchase.

Insufficient Deposit

Most lenders will want evidence that you have enough funds available to complete the sale. So they may check bank statements and other records to confirm the funds are there. Guess what - if the lender doesn't have the evidence, your loan application will be rejected. Make sure you have the proof you need. If someone is giving you the money as a gift, have it in a bank account in your name, ready to show the lender. Alternatively, if the seller is going to take back a second mortgage on the property, make sure you have documents to support that. Finally, you may just have to put off your purchase until you've saved up more money.

Insufficient Income

All lenders have a "rule of thumb" that they use when it comes to assessing how much of your income can be used for mortgage payments. Most have a maximum of around 28% of gross monthly income (before tax). They will also look at any other debts you have to make regular payments on, including car loans, personal loans and credit card debt. Again, if the repayments exceed a certain percentage of your monthly gross income (usually around 36%) your loan application will be rejected. Other factors may come into it, such as a good credit record. Also, if you can comfortably show that you're already paying out a large amount in other expenses, such as rent, or perhaps an existing mortgage (if you're refinancing), then a lender may be willing to make an exception. The most important thing is to make sure that you don't try and hide anything during the application process.

Too Much Debt

A lender's main aim is to manage risk. They don't want to have the hassle of foreclosing on your home, and so they will closely scrutinise your existing debt and how well or badly you manage it. If they see a history of steadily increasing credit card balances, or loans that never seem to get paid off, they're unlikely to accept your application. Be aware, too, that although the balance of your $5000 credit card may currently be $0, the lender will still assess you as though you've spent the full $5000. So closing down credit cards you don't use can be very helpful. Also, pay off as many other debts as possible before reapplying for a loan. And when you those lovely, friendly letters in the mail that tell you you're preapproved for a limit increase on your credit card - tear them up!

Poor Credit History

Again, a lender wants to limit the risk involved in giving you a loan, and a poor credit history is a major flashing red warning signal to them. If you have lots of late charges listed, you have a number of unpaid loans, a history of insolvency or unpaid bills - you're going to have trouble securing a home loan. Even making multiple applications for a home loan can worry a lender. This is an issue that won't be fixed overnight, but over time you need to pay off outstanding debts, make sure you pay all your bills on time and over time your credit history will improve. If you're only requesting a very low loan-to-value ratio, say 70% of the appraised value of the home, you may still be able to borrow, but you may have to accept a higher interest rate.

Having your home loan application rejected isn't the end of the world. Maybe this time you fell short on the lender's requirements, but if you take the time to learn what prompted the rejection, you have a way to move forward and make sure your application is accepted next time around. Remember, too, that being rejected may even be a blessing - after all, if the lender thought you couldn't afford it, maybe they were right, and by rejecting you they've saved you a lot of financial hardship.

So find out why you were rejected, and move on with a plan to improve your application next time. Good luck!