Having your home loan declined can be a very disappointing experience - but if you know why it was declined, you can take steps to rectify it.
Here are some of the key reasons your home loan could be declined:
You have a poor credit history
Your credit record contains details of your current and past financial behaviour - it shows all your previous and current debts, and how you have managed that debt. It includes things like cellphone subscriptions, credit cards, personal loans, and any other credit you repay monthly.
Did you miss repayments or made late payments? These can leave black marks on your credit report and lower your credit score. A poor credit history and a low credit score is a red flag that warns prospective lenders of higher risk, and it could be the reason your loan application is declined.
Keep in mind that if you don't have any credit history, banks will also be wary to lend you a significant amount of money as they have no history to see how you manage debt and repayments.
Make sure you build a credit history responsibly.
You have a low affordability score
Affordability comes down to making sure you have enough funds to repay all your debts, including a home loan repayment.
When you compare your monthly income to your existing monthly expenses, debt repayments, and other financial commitments, the amount you have leftover is called your discretionary income. Whether the bank considers a loan ‘affordable’ for you depends in part on how much of your discretionary income the loan repayments will take up.
The best thing to do is to create a monthly budget, with savings built-in and see how much you could actually afford to spend on a home loan.
Too many credit applications
While it might be tempting to simply apply for a home loan at another bank or financial institution right after your first home loan application was denied, you really shouldn't.
Remember that every credit application you make goes on your credit record and multiple applications for credit in quick succession is also a red flag.
To lenders, multiple applications in succession could mean someone is trying to get as much credit as they can because they foresee cashflow problems ahead. If they take on too many loans, they could also struggle to repay them all – another reason too many applications will affect someone’s credit score.
What to do when your home loan has been declined
The best thing to do when your home loan has been declined is to enquire why it has been declined.
If the problem is affordability, your lender may be able to advise you on how to restructure your credit portfolio so that the loan is affordable. Or the solution might be setting your sights on a smaller loan.
If the problem is your credit record, take comfort from the fact that you can restore it over time. Your service provider can advise you on what steps you can take to improve it.
Remember: a certain amount of well-managed debt can improve your credit score. A loan can be a force for good.