Reasons loans are declined
We have outlined below the most common reasons loans are declined.
We often have solutions with first tier lenders...(a small difference in lenders policies can mean one lender will do a loan and one wont).
1. Genuine savings
If you are looking to purchase a property with a high loan to value ratio (typically over 80%), most lenders will require you have genuine savings. There is normally a requirement to have at least 5% of the purchase price saved up and held over a 3 or 6 month period. Check out our dedicated genuine savings and non genuine savings page for more details.
2. A black mark on your credit file
An adverse mark on your credit report – even a small default from a phone bill 4 years ago – can mean the difference between getting your loan approved and having your loan declined. From 2012, credit reporting will become more comprehensive.
At the moment a credit file is somewhat limited in that it only reports credit application activity and negative outcomes over the last 5 years (7 years for bankruptcy). As in, it only shows what loans you have applied for and what loans you have defaulted on over the last 5 years. It doesn’t show what loans you actually took out, what loan applications were declined (if any), and if you pay your loans on time. This is set to change soon to include much more information.
3. Too many enquiries on your credit file
As mentioned above, currently your credit report only shows if you have applied for a loan, and not whether the loan was approved or declined. Too many recent loan application listings on your credit file can make a lender nervous as they may think you have had your loan declined by a few lenders and are now not telling them the whole story on your application. It also severely affects your credit score if a lender uses one (see below).
4. Credit scoring
Many lenders are now using a credit score system to assess loan applications before actually verifying any supporting documents. Over every aspect of an application a formula is used to automatically assess your credit worthiness. Lenders keep the credit scoring formula very secret so that applications cannot be manipulated to pass.
As an example, if you have moved house 4 times in the last 2 years, then your credit score for that section of a loan application would be high (high is bad). That alone would not be sufficient reason for your loan to be declined, but if you had other high scores in other sections of your application, the overall results could cause your application to fail the automated scoring system. This would mean you would have your loan declined.
So even if you meet all of a lender’s criteria, you can still have your loan declined! And with some lenders, once an application fails credit scoring there is no room to appeal the decision even if there are extenuating circumstances. Although no explanation is given as to why a loan application actually fails a credit scoring test, one of the most common causes we know of is a combination of a) too many enquiries on your file within the last 6 or so months and b) a low asset to liabilities ratio for your age. Luckily not all lenders use this system!
At Mortgage Experts we have had over $200,000,000 in loans approved since 2003. We have a fairly good idea as to what loans will not pass a credit scoring test and which ones will. We also know which lenders use a credit scoring system so can work with you and the right lender to get your loan approved and not declined. It definitely pays to go to the right lender first!
5. Property valuation issues
Although out of our control, another common reason for a loan application to be declined is that there are issues with the security property that become apparent when a valuation is done for a lender.
Valuation issues can cause a loan to be declined when:
- The valuation of the property that is to be security for the loan comes in less than the estimated value. This can affect the loan to value ratio (LVR) which in turn can mean an application falls outside the lenders guidelines. For the purchase of a property, the lender will in almost all cases take the lower of the valuation amount or the purchase price. For a refinance, the lender will always use the valuation amount.
- The valuation report has adverse comments about the properties resale ability or general condition.
- The property is deemed to not be acceptable security for a mortgage. Property types some lenders don’t like include very small units (less than 40m2), high rise apartments, serviced apartments, properties in remote locations, properties in mining towns, company title units and properties that are both commercial and residential (mixed use). Please see our unusual property pages for more details.
6. Borrowers approaching retirement age
It has become increasingly difficult for borrowers approaching retirement age to borrow to buy a home to live in. While this has always been a concern for some lenders it has become even more of an issue for most lenders since the new responsible lending laws came into full effect as at the 1st of January 2011. It is now vital that you clearly communicate to a lender your loan exit strategy i.e. how you will pay off the debt after you retire. The best person to talk to about your exit strategy plan is a good broker who understands the concerns a lender will have and who can then work with you to allay their concerns by communicating your plan to a lender in language they understand.