Money

4 Common Reasons Why Banks Decline Home Loan Applications

Story Highlights

  • Reason #1 - Affordability
  • Reason #2 - Credit history
  • Reason #3 - Debt review/under administration
  • Reason #4 - Loan value too high

If buying a house was easy, everyone would have one, right?!

Finding the capital to put down a deposit on a property is not as simple as it sounds and you might have to save for a good few years before you actually have a decent sum of money available.

What many people also forget to include in their budget and research is the extra money that has to be paid every month.

Debit orders, taxes, rates, levies, and the maintenance of the home. Looking at those figures is quite a sobering thought.

Banks, however, take all of that into consideration which is why they are very careful in approving home loans. They do have demanding criteria that the potential property owner has to adhere to before they can walk into their dream home.

Investors that don’t meet these criteria might find themselves being rejected and losing out on the property deal of a lifetime.

Luckily, there are easy ways to ensure that the bank approves a home loan. Below are 4 main reasons why banks decline home loan applications and what potential homeowners can do in order to fix it.

Reason #1 – Affordability

This is an important aspect and one that is measured by net not disposable income. It is calculated by considering the client’s gross income, net income, and fixed monthly expenses.

A financial institution will not approve a loan if the expenses are more than a third of the monthly income. They also take any debt into consideration before approval.

In order to improve the chances of being approved, current debt should be reduced as far as possible. Potential homeowners should also be realistic when it comes to the price of the home that they want to buy.

Reason #2 – Credit history

One of the major areas that will be investigated when applying for a home loan is credit history.

The credit score will definitely influence the approval of the home loan and it will also play a huge role in determining the requirements for a deposit as well as interest rate charges.

Potential homeowners should be aware of their credit score and keep it clean by paying their instalments on a regular basis.

If any payments have been defaulted on, ensure that these accounts are settled and that the credit provider is contacted in order to determine whether your name has been cleared.

Reason #3 – Debt review/under administration

The National Credit Act states that any person or institution lending more money to a person who is already under debt review would be guilty of reckless lending. This is a serious offence that carries high penalties.

Banks and other financial institutions will not approve home loans if you are under debt review.

Before applying for a home loan, ensure that existing debt is settled and that all records are cleared. There is generally a waiting period of a year after debt has been marked cleared before financial institutions will assist you. It is recommended to use a budget planner in order to do this.

Reason #4 – Loan value too high

You might have an excellent credit record and more than enough disposable income, but if the value of a property is too high then financial institutions won’t approve the bond.

Institutions need to ensure that they have enough security on the loan and this, in turn, protects the buyer from purchasing a home that is too expensive.

Steer clear of all areas where property values are static or declining. And if you are set on a certain home, increase the deposit. If you don’t have a deposit, consider taking out a personal loan.

Be advised, however, that this will form part of another debt payment and might lower your affordability.

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