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Why was my home loan application rejected?

A lender will reject applicants that seem likely to default on the loan.

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Belinda Punshon
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Not only can a rejected application prevent you from getting your ideal home, but it can also stay on your credit file and hurt your chances of having future loan applications approved. So let’s take a look at some common reasons why lenders reject mortgage applications, as well as what you can do to ensure your application is approved.

Why was my home loan application rejected?

Each lender imposes its own lending criteria on the mortgages it offers. Lenders will reject applicants who don’t meet the criteria because they pose a higher risk of defaulting on the loan.

Some common reasons why lenders reject loan applications include:

  • Defaults on credit file. Your credit report plays a crucial role in the mortgage application process. It lists the current loans in your name, previous loan applications and whether you’ve defaulted on any loans or made late payments in the past. A negative credit report will hurt your chances of being approved. It’s a good idea to request a copy of your credit file before you apply for a loan to get a better idea of whether you’ll qualify.
  • Low down payment. Every home loan you see has a range of terms and conditions attached, one of which is the maximum loan-to-valuation ratio (LTV). This is the maximum amount you are allowed to borrow, expressed as a percentage of the value of the property you want to buy. For example, if a loan has a maximum LTV of 80%, you’ll need a deposit of at least 20%.
  • No proof of savings. Lenders will also request proof of sourced and seasoned savings, which usually takes the form of a bank statement showing regular contributions into a savings account over at least three months. If you can’t provide this proof because the down payment was a gift or bonus, you may not qualify.
  • Borrowing too much. A lender won’t give you a mortgage that’s more than they think you can afford to repay.
  • Unsatisfactory debt-to-income ratio. As part of the application process you’ll need to provide details of any debts in your name, as well as the income you earn. The lender will use this information to work out how much of your monthly income you use to service your debts, and therefore how likely you are to be able to afford mortgage repayments.
  • The property is overpriced. Before approving any home loan, a lender will have the property you want to purchase professionally valued. If you’re paying much more for the property than what the bank deems to be a fair price, your lender may be worried that it will be unable to recoup its losses if you default on the loan and it has to sell the property.
  • Other property issues. Some lenders will exclude certain types of properties from lending. For example, some lenders don’t offer financing for mobile homes or apartments.
  • Failing to provide documentation. From employment and contact details to information about your financial situation and the property you want to buy, lenders request a substantial amount of information when you apply for a loan. If you can’t provide all the necessary details in a timely fashion, your application could be refused.

What can I do to improve my chances of approval?

Having your application rejected can be disappointing, but there are plenty of steps you can take to boost your chances of approval next time you apply for a loan.

  • Save a larger down payment. The larger the down payment you have, the more likely you are to be approved. And you may be able to avoid the additional expense of private mortgage insurance (PMI) if you borrow less than 80% of the home’s value.
  • Be realistic. That multi-million-dollar waterfront mansion might be the home of your dreams, but it may not be a realistic goal in your current financial situation. Work out how much you can afford to borrow and repay before you decide which properties are in your price bracket.
  • Pay off your debts. If you’re paying off a car, a couple of credit cards and other debts, these repayments will eat into your monthly income and count against you when your application is being assessed. Taking the time to pay off all your debts will put you in a good position the next time you apply.
  • Make regular savings contributions. If you can provide proof of regular contributions into a savings account over a period of several months or more, you can quickly and easily demonstrate your financial discipline to your lender. Consider setting up a regular direct debit into your savings account.
  • Demonstrate job security. If you can show that you’ve been employed by the same company for more than two years or worked in the same industry for 12 months, you’ll be able to demonstrate job stability and a reliable income source to your lender.
  • Do your real estate homework. Before you decide on a property to buy, do your research and examine current market trends and what similar properties in the area are worth. This will help you work out whether you are paying a fair price for a property or being overcharged.

What if my application is suspended?

If the lender doesn’t have enough information to make a decision, or if the information in your file is difficult to verify, your application will be suspended. This just means that the lender needs more supporting documentation.

You should receive a list of additional documentation you need to provide. Once you send it in, your application will proceed. If you’re unable to provide the documentation your lender has asked for, contact them directly to figure out if there’s an alternative.

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What can I do if I’ve been rejected?

1. Try a mortgage broker

If you didn’t have a broker in the first place, it might be wise to enlist their help once you get your first rejection. They can work with you to make sure you’re presenting all your information in the best possible light and also help steer you in the direction of a lending institution that you might give you a better chance of getting your loan across the line.

2. Research other lenders

You can also research other lenders yourself and apply with a different lender. Start by finding out why your application was denied, and use that information to find a more suitable lender. For example, if your credit score was too low, look for a lender that specializes in underwriting for buyers with poor credit.

3. Wait and reapply

The absolute safest course of action is to wait six months, get your finances in order and reapply. Take some time to pay down existing debts, save a larger down payment and build your credit score before reapplying.

Bottom line

If your mortgage application was denied, it doesn’t mean you’ll never be able to get a house. If your application was denied on a technicality, like if you applied for a condo loan with a lender that doesn’t offer them, you can compare other lenders and reapply with a more suitable option immediately.

But if you’re not financially stable enough to qualify, you may want to take some time to work on your finances before reapplying.

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