Stricter lending conditions have put the brakes on mortgage applications, with many more first home buyers struggling to meet the latest lender requirements. Along with tightened bank lending caps to low deposit borrowers, and a far greater scrutiny on expenditure, some lenders have introduced a minimum committed income for approvals over 80 per cent loan to value ratio (LVR), making it even harder to get home loan approval. Find out what it means for you if the bank declines your home loan application, and what the next steps are in this situation.

Why your application might have been declined

Being a loyal customer to your everyday bank doesn’t necessarily give you a head start when it comes to a mortgage application approval. And it’s not uncommon for banks to approve lending to a new customer, while declining someone who has banked with them for several years.

The fact is, there are a number of reasons why the bank may decline a home loan application, but the most common reasons are these: 

• Too much debt: Borrowers who already have other debt – such as a car loan, personal loan or credit card – may be perceived as having too much debt and unable to afford a mortgage.
• Poor credit history: Missed repayments or late repayments on other debt or utilities can affect your credit score and make it harder for you to access future credit.
• Fluctuating income: Lenders are generally reluctant to lend to those with inconsistent income – for example, self-employed or contractors – or those with an erratic work history or frequent job changes.
• Insufficient deposit: LVR restrictions limit the amount of low deposit lending that banks can do, so borrowers with less than a 20 per cent deposit may find their application is turned down if the lender has already reached their lending cap. 

What your options are

Depending on the reason why a home loan application was turned down, there are some things a borrower can do to ensure they are in a better position when applying in future. Here are some options: 

• Try another lender: Banks use a variation of calculations to determine affordability and borrowing power. If your application is declined, it’s worth discussing with your mortgage adviser your options for financing with another lender.
• Pay down your debt: If existing debt is holding you back and impacting your debt to income ratio, then you may need to spend the next few months paying back your debt in full and reducing your credit card limit.
• Improve your credit score: Always pay your bills on time, and keep track of your credit score by requesting a free credit check every few months.
• Increase your income: Think about how you could bump up your income – and your deposit. A part time job, selling an existing asset, a tax rebate or some other windfall that could be allocated to your deposit.
• Consider a non-bank lender: Unlike banks, second tier lenders are not subject to LVR restrictions, and may offer greater flexibility around low deposit lending. For borrowers struggling to get bank finance approval, non-bank lending could provide a solution in the interim.
• Get help from family: Whether it’s a cash gift or an interest-free loan, someone to act as guarantor or be a joint borrower, if your situation allows, getting help from a family member could be just what you need to get started on your home buying journey.

Getting turned down isn’t necessarily the end of the road when it comes to applying for a home loan. But it pays to get help when navigating the New Zealand mortgage market. To ensure you’re in the best possible position before you submit your home loan application, get expert advice from a Mortgage Express branded mortgage adviser.