Receiving the news that your home loan application has been rejected is one of the most dreaded phrases for potential homebuyers. It can be a devastating blow, especially considering the surprising reasons behind such rejections.
A denied loan application can impede your plans to buy a home and potentially have a negative impact on your credit score. Therefore, it is crucial to take steps to prevent this situation from occurring.
There are numerous surprising reasons why your application for a home loan may be rejected, and it can come as a significant shock. Here are five unexpected factors to consider in order to avoid the heartbreak of a rejected home loan application.
Spending Habits: It is common knowledge that excessive spending raises concerns for lenders, so it is important to limit unnecessary expenses. However, drastically reducing costs and living an excessively frugal lifestyle can also be seen as unrealistic and unsustainable. Lenders may evaluate your household expenditure using the household expenditure measure (HEM), a standardized benchmark for estimating annual living expenses. If your budget appears overly frugal, it may raise red flags.
Credit Cards: Having multiple credit cards and frequently transferring balances can impact your loan application. Each credit card application is recorded in your credit history, which lenders take into consideration. Even if you possess a credit card for emergencies only, lenders may require evidence that you can pay off the credit limit within three years, regardless of the current balance.
Buy Now Pay Later (BNPL) Services: The Australian Prudential Regulation Authority (APRA) has updated its framework to include BNPL debts in the calculation of debt-to-income (DTI) ratios. Lenders may incorporate BNPL debt into your DTI ratio to assess your total debt relative to your income. A high DTI ratio can limit your borrowing capacity or even lead to rejection.
Credit History: Your credit history can be a fickle aspect. Even a few late payments can cause your credit score to drop. Hence, it is crucial to ensure that you pay your bills on time. Moreover, applying for numerous credit cards or loans can negatively impact your credit score and, consequently, your home loan application. Given the rising prevalence of scams, data breaches, and identity theft, regularly checking your credit history is advisable. You can request a free credit report once a year from one of the three national credit reporting bodies, listed on the government website.
Type of Income: The nature of your income can greatly influence your loan application. Lenders typically prefer applicants with a stable and reliable income from traditional employment. Self-employment is often seen as carrying more risk due to less consistent income, leading some lenders to reject applications from self-employed individuals. Therefore, if you are self-employed, it is important to target lenders who are more open to lending to small business owners. Additionally, it appears that tax debt is increasingly becoming an issue for self-employed applicants. If you have a significant tax debt, it would be worthwhile to address it before applying for a home loan, if feasible.
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