4 reasons your home loan application might be declined

Having a home loan application declined can be a frustrating experience, especially after months of saving and searching for the right property.

While lenders assess applications differently, there are some common reasons why borrowers don’t get approved. Understanding these factors before you apply can help you put your best foot forward and improve your chances.

Here are four of the most common reasons home loan applications are declined, and what you can do about them.

Your credit history has some issues

Lenders will review your credit report as part of the application process. This report contains a record of your borrowing history, including any missed or late payments, defaults, credit enquiries and other financial obligations.

A history of missed repayments or a default listed on your file can raise concerns for lenders about your ability to manage debt. Even multiple credit applications in a short period can have a negative impact, as each application typically generates an enquiry on your credit file.

Before applying, it’s worth requesting a copy of your credit report to check for any errors or issues that could affect your application. If there are problems, taking steps to address them before you apply can make a difference.

Your borrowing capacity doesn’t meet the lender’s requirements

Lenders calculate how much you can borrow based on your income, existing debts, living expenses and other financial commitments. If your expenses are high relative to your income, or you carry significant existing debt, your borrowing capacity may fall short of the loan amount you’re applying for.

Credit card limits can also affect this, even if you rarely use them. Lenders typically assess credit cards at their full limit rather than the balance outstanding, which can reduce your borrowing power more than many applicants expect.

Reducing or closing unused credit cards, paying down existing debts and reviewing your regular expenses before you apply are all steps that may help improve your borrowing capacity.

Your employment or income situation

Lenders want to feel confident that you have a stable, ongoing income to support your repayments. If you’re newly self-employed, have recently changed jobs, or earn a significant portion of your income through commissions, bonuses or casual hours, some lenders may view your income as less predictable.

Self-employed borrowers, in particular, may face additional scrutiny. Lenders typically want to see at least two years of tax returns and financial statements to assess income reliably. If your business is newer than that, or your taxable income is reduced through legitimate deductions, it can sometimes complicate the application process.

Understanding how your income is assessed by different lenders before you apply can help you approach the right lender for your situation. A mortgage broker can be particularly useful here, as they can compare your options across lenders with different policies.

Doesn’t meet the lender’s criteria

Most lenders require a minimum deposit, typically at least 10 to 20 per cent of the property’s value, though this can vary. Borrowing above 80 per cent of the property’s value usually means paying Lenders Mortgage Insurance (LMI), which adds to the overall cost.

The property itself can also be a factor. Some lenders have restrictions on certain property types, including small apartments, properties in specific postcodes, rural or remote locations, or properties with structural issues. If the lender’s valuation of the property comes in lower than the agreed purchase price, it can also affect how much they’re willing to lend.

Knowing a lender’s property requirements before you apply can save time and help avoid the disappointment of a declined application after you’ve already found a home you love.

If you’re unsure about any aspect of your application, speaking with a mortgage broker before you apply is a good first step. A broker can review your financial position, help identify any potential issues, and compare your options.