Bank Says No To Your Mortgage? Here’s What You Can Do

27 Apr Bank Says No To Your Mortgage? Here’s What You Can Do

If your mortgage application has been declined and you’re not sure which way to turn, start by understanding the reasons why the bank said no. Whatever’s holding you back, whether it’s bad credit, too much debt, low deposit, or a property that’s unacceptable to the lender, it doesn’t have to be the end of the road on your home buying journey. Here are 4 reasons why mortgage applications get declined and what you can do when the bank says no.

1. Bad credit history

When lenders consider mortgage applications, one of the first things they’ll check is credit history. How your repayments have been managed in the past will have a direct impact on your ability to secure credit in the future. There are a few things that can hurt your credit score, including:

• Missed or late repayments on a credit card, loan, utility, or phone bill that result in a default.
• Too many credit applications in a short space of time.
• Bankruptcy or insolvency issues.
• Little or no credit history.

Even with a bad credit history, there are ways to improve your credit score that will increase your chances of a successful mortgage application. Things like:

• Paying your bills on time.
• Fixing errors on your credit report.
• Using credit wisely and only applying when you really need it.
• Avoiding multiple credit applications.
• Repaying debts to repair defaults.

Reviewing your credit report and exploring alternative financing options with the help of a Mortgage Adviser who specialises in bad credit home loans, could uncover other possibilities that may have been missed.

2. Too many debts

Banks in New Zealand must abide by the Responsible Lending Code, which stipulates that lenders use due diligence to determine if a borrower is able to service a loan without suffering financial hardship. Part of this process involves scrutiny of debt-to-income ratio (DTI).

DTI ratio is an affordability measure that compares your total debt from all sources against your gross income. Which is the total balance of borrowers’ debts (to all lenders) divided by total gross income. Some lenders use this calculation to determine how much they’re prepared to lend or whether they’re prepared to lend. If the bank deems your DTI is too high, your mortgage application may be declined.

As each bank has very different rules for lending and some have higher test rates or may be less likely to lend at different times in the market cycle, it’s helpful to discuss your options with a Mortgage Adviser who understands each lender’s requirements. Furthermore, taking control of your debt with a debt consolidation loan could help you pay back your debt faster which will improve your debt-to-income ratio.

3. Low deposit

Loan to value ratio (LVR) restrictions have been put in place by the Reserve Bank of New Zealand to limit the amount of low deposit lending – lending to borrowers with less than 20 per cent deposit – that banks can do. However, only a small percentage of banks’ lending can be done at this level, just 10 per cent of the money lent out by the bank can be borrowed by low-deposit owner-occupiers and 5 per cent for low-deposit investors. Once this quota is reached, banks can no longer lend to high LVR (low deposit) borrowers. As banks don’t necessarily advertise when they reach the limited amount of low deposit lending, it is better to work with a Mortgage Adviser when you have high LVR (low deposit). A Mortgage Adviser will know which banks are still open to lending with a low deposit and which are currently constrained in doing so.

While LVR restrictions may limit the choice of lenders for borrowers with a high LVR – those borrowing over 80 per cent of the property’s value – there are a few ways around this:

• Find a lower value property so you don’t need to borrow as big a mortgage.
• Explore your deposit options and try to get a larger deposit together.

Work with a Mortgage Adviser to find the best deposit option for you, and consider personal loans to make up the required funds if you’re struggling to save enough for a home deposit or you want to avoid paying Lenders’ Mortgage Insurance (LMI).

4. Property not acceptable to lender

Finding your dream home isn’t just about ticking the check boxes on your own list. The lender will also want to know that the property you’re buying meets certain standards and specifications. Because banks always want to minimise their own risk and ensure they’re not left in a compromised financial position, they may reject a mortgage application based on the property not being acceptable to the lender.

Risk homes that banks are reluctant to lend on include small studio apartments, leaky homes with a certain type of construction, homes not compliant with Council regulations, homes in unusual locations, or homes that would only appeal to a small segment of the market and may be harder to sell.

In addition, banks will refuse to lend for homes that cannot be insured. For instance, homes in flood zones, on slips, or in red earthquake zones are at risk to extreme natural events caused by global warming and will not be insured by insurance companies. Therefore, it is recommended to consult with an insurance adviser before purchasing a property to ensure that there are no issues with obtaining insurance or that insurance isn’t too expensive.

Before viewing a property or putting in an offer, consult with your Mortgage Adviser to find out which homes lenders will consider and which they are likely to decline. Your Mortgage Adviser can help you determine the type of property that is acceptable to lenders, so you don’t waste time on properties that won’t get approved for a mortgage.

Advice on your home loan journey

At Max Mortgages, our Mortgage Advisers help Kiwis reach their property ownership goals, with personalised advice for home loans NZ wide. If the bank has said no to your mortgage application and you need help with bad credit home loans or debt consolidation loans to get you back on track again, get in touch with our team today.

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