Top Five Reasons Why Your Loan Would Be Declined
It can be extremely disheartening to have your loan application declined, especially if you already have a property in mind.
The best response is to treat the rejection as a positive learning experience, and an opportunity to strengthen your financial position so your application will be successful next time.
Here we look at some of the more common reasons your loan application would be declined and how you can turn the situation around:
Lenders calculate your borrowing power based on the balance between your income and your financial commitments. If the balance is insufficient to pay off a potential loan, they will not approve your application.
You have two options – you can reduce your financial commitments by tightening your budget, or you can find a way to increase your income.
One or both of these strategies will create a larger balance between your income and expenditure, giving you more funds to funnel towards paying off a loan.
1. Bad credit
Your future lender wants to see that you have a good history of repaying loans promptly and responsibly. If you’ve actually been the prudent type who avoids debt, you won’t have much evidence that you are a reliable borrower – you can fix this by using a credit card to demonstrate that you will make prompt and reliable repayments.
However, it will be more difficult to prove yourself a good risk if you have a history of defaulting on loans, so you may need some time to improve your credit record before applying for a new loan.
2. Excessive debt
Lenders will look at every aspect of your financial position, and will pay particular interest to any outstanding debts you already have.
If the lender can see that your debt repayments exceed your income and assets, they will be wary about lending you more money.
The solution here is to reduce your debt before taking on more financial responsibility.
Start with the highest interest debts first and reduce any other regular outgoing payments, so you can demonstrate that you have the income to manage your loan.
3. Insufficient savings
Your savings not only provide a deposit and a buffer, they also demonstrate that you are a good risk who is committed to achieving your long-term goal. If your application is knocked back due to your lack of savings, start by putting aside a small amount from each pay, and watch it build.
Keep in mind that a sudden windfall such as an inheritance does not demonstrate your ability to save! You need to show consistency and self-discipline.
Even three months of regular savings can be enough to convince a lender that you are a good risk.
4. Irregular income
Today many people choose a more flexible approach to working than the traditional 9 to 5 job with a regular salary. If you are self-employed or do contract work, or even if you have switched jobs recently, a lender might be concerned that you will be unable to handle regular loan repayments.
However, as more people shift from traditional employment, there are lenders responding to the challenge.
Look for a lender who specializes in home loan products specifically for people with irregular income.
5. Unsuitable property
Sometimes it’s not your financial situation that causes the problem. The property you want to buy may be a bad risk, or perhaps you are proposing to pay more than it is worth. In this situation, the lender will see that you cannot redeem the value of the loan and they will turn down your application.
When a loan is declined for this reason, the lender is actually doing you a favor. You want your investment to be as profitable and manageable as possible, so listen to the lender’s advice and find a property that has more potential to be a good investment.
Overall it helps to see your lender as an astute and helpful business partner who wants to ensure you are in the best possible position to manage your loan.
When your loan is declined, look at this as an opportunity to strengthen and improve your position so you will get the right loan package for your needs, you can make repayments comfortably without any additional financial pressure, and the property will build into a good investment for you.