There are several reasons why home loan applications might be declined, but below are some of the main reasons as well as possible solutions.
Affordability is such an important element in the bond approval process and should be addressed first.
Affordability under the National Credit Act is measured by net disposable income. This is calculated using the applicant’s gross income, net income and fixed monthly expenses. According to legislation a financial institution may not approve a home loan where the monthly repayments will exceed one third of the applicant’s net monthly income. Current debt repayments will also be considered when calculating the affordability of the loan.
To improve your chances of your home loan approval current debt should be reduced wherever possible and potential homeowners must be realistic when determining the price class of the home that they can afford to purchase.
2. Debt Review / Under Administration
According to the National Credit Act a financial institution which provides any further credit to a person whilst under debt review or administration would be guilty of reckless lending which is considered a serious offence and could attract high penalties for such institutions.
Banks and other financial institutions will understandably not consider a home loan application if you are under debt review or administration.
Before applying for a home loan make sure you settle all your existing debt and have your ITC records cleared after debt review.
If you have been placed under administration then generally there will be a waiting period of a year after rehabilitation before banks will be willing to assist you with a home loan.
To help pay off your debt, it is recommended to use a budget planner.
3. Credit History
Credit history is one of the major criteria used by financial institutions when assessing risks for home loans. Your credit score will not only influence the approval of your home loan but may play a role in determining the deposit requirements and interest rate charges.
It is highly recommended that potential home owners be aware of the contents of their credit report.
To ensure a clean credit report make sure that you pay your accounts on time on a regular basis. This will optimise your chances of securing a home loan.
If you have defaulted on any debt repayments in the past make sure that you have settled these accounts and then contact the credit provider and determine whether or not your name and credit record has been cleared. If you have a judgement on your credit report relating to an account which has now been settled contact an attorney to have the judgement rescinded.
4. Loan to Value too High
Despite the fact that you may have an excellent credit record and a more than sufficient disposable income financial institutions will decline a home loan application where the market value of the property is less than the loan application. The financial institutions must ensure that they have sufficient security for the requested loan. This in turn safeguards potential buyers from paying a price in excess of the value of the property.
If possible steer clear from areas where property values are either static or are declining. If you are really set on a property where the market value exceeds the selling price an alternative is to increase the deposit thereby reducing the loan to value ratio.
If you do not have money saved up for a deposit, you can consider taking out a personal loan. Keep in mind that a personal loan would also count as another expense, and could lower your affordability again.