What to do if your home loan is denied

Applying for a home loan can involve a lot of preparation, even just in terms of finding the right lender and putting together the necessary documentation. You may have already set your heart on a house as well. Finding out that your lender of choice won’t approve your loan can be a significant setback. Often it can be tempting to apply for another loan immediately, but that is not always the best next step. 

One big reason to avoid another potential application rejection is you could end up with multiple hits to your credit score, as each loan application will involve pulling your credit score. Discussing the reasons for rejection with the lender can help you make the necessary changes to your application and avoid the risk of further damaging your credit rating - or wasting your time. 

What do I do if my home loan is denied right before closing?

Having your home loan denied just when you think it’s a done deal can be hard to comprehend. But lenders consider several criteria when reviewing your home loan application and won’t approve your application until all criteria are met. Consider asking the lender if the following are the reasons your home loan got denied:

Don’t I earn enough to repay the loan?

Lenders usually ask for verifiable documentation that can prove you earn as much as you claim on your application. However, they may still use their calculations to estimate whether you can meet your loan repayment conditions with this income. You may need to check whether all your income sources have been accounted for, including tax-exempt items.

Do I have enough saved for the deposit?

Most home loans may require the borrower to put up as much as 20 per cent as the deposit, although some home loans may require a smaller amount with Lenders Mortgage Insurance. If the lender thinks your deposit is inadequate, they may not wish to take on the risk of lending you the amount you’ve asked for.

Are there problems in my credit report?

Since a home loan is a considerable debt, lenders review your debt repayment history, recorded in your credit report, as a way of assessing you as a borrower. If you’ve missed a bill payment or struggled with any kind of debt in the past, this can affect your home loan application for several years. You may want to explain to the lender the steps you took to overcome the situation while submitting your application to avoid rejection and see if they might reconsider your application.

What else went wrong?

Don’t be afraid to ask the lender why they didn’t give you the loan. It may be something you can fix. There may also be other loan arrangements that are more appropriate, such as a guarantor loan. 

What do I do if my home loan is denied after conditional approval?

Your home loan could be denied after conditional approval or pre-approval if the house you’ve shortlisted doesn’t qualify for the home loan or if the lender feels that your financial circumstances have changed. You may need to look for another house or submit fresh documents attesting to your income and savings. You may be able to avoid this situation by asking the lender about the kind of house they find eligible for their home loans at the time you get the pre-approval. You should also make sure you apply for the home loan before the pre-approval expires. 

However, if you’ve been pre-approved for a home loan but subsequently face financial hardship, you may want to wait until you can improve your finances before applying for the home loan.

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