Want to refinance your mortgage but worried you’ll be rejected? Find out how a lender will assess your home loan refinance application.
The best step you can take upfront is to work with an accredited lending specialist who not only understands your goals, but who is knowledgeable in credit and honest in all discussions.
Sometimes you may hear things you don’t like – but don’t take it personally! A lending specialist’s goal is to get the best result for you based on your personal circumstances.
Here are some of the reasons applications to refinance mortgages are rejected by lenders:
Your credit score is too low
When you apply to refinance your home loan, you’re essentially applying for a whole new mortgage. That means a lender will assess your application using the same criteria they would for other home loans. And one of the most important factors they’ll consider is your credit score.
Your credit score essentially marks you on how responsible you are with money and takes into account any credit infringements, judgements or bankruptcies. It also looks at how often you’ve applied for credit and whether you’re meeting your credit card and personal loan repayments on time.
Your credit score changes over time, so chances are yours will be different now to when you took out your current home loan.
If your credit score is holding you back, you can take steps to fix it yourself. That includes paying back any money you owe, making sure you meet your monthly repayments into the future and avoiding applying for credit other than your refinanced mortgage.
Related post: Why your credit score is important and now more visible
Your financial circumstances have changed
Whenever a lender assesses a loan application, they always consider your capacity to meet your loan repayments. This means looking at your income, including salary and bonuses as well as the money you receive from any investments. If you’re refinancing to help buy an investment property a lender will factor in any likely rent you’ll receive from this also.
If your income has dropped since you last applied for a home loan, you may not be able to borrow as much as last time – in which case, a lender may reject your refinance application.
If your circumstances have changed only temporarily – for instance, if you’re out of the workforce on parental leave or having a career break – you could give yourself a better chance of being approved by waiting until you return to work before you apply to refinance.
Alternatively, if your income has reduced permanently, you may be able to extend the terms of your loan to reduce your loan repayments. Because you’ll likely be better able to meet these repayments, this may also improve your chances of being approved.
Your living expenses are too high
Lenders won’t just look at what’s coming into your bank account – they’ll also consider what’s leaving it. If your living expenses are high, this will affect your ability to get a loan.
Lenders will be especially concerned about any non-negotiables you need to pay for, including the cost of raising children. So, if you have more dependents than last time you applied for a loan, they’ll take this into account.
They’ll also assess what you’re spending on items such as childcare, ongoing rent, education, utilities and entertainment. To avoid a refinancing rejection, it’s important that you live within your means and cut back on unnecessary expenses if you need to.
This is an important area to get right as lenders may peruse your transaction statements to confirm expenses. Lending specialists (LJ Hooker Home Loans as an example) have access to technology that can electronically read your statements and provide you with a detailed analysis.
You have too much debt
For any lender, assessing what’s leaving your bank account involves more than simply assessing your living costs. They’ll also factor in any other credit you have access to, including personal loans and credit cards – even if you don’t owe anything on them.
To help avoid being rejected, you could close down any credit cards you’re not using. You may also choose to consolidate any personal loans or credit card debt into your refinanced home loan so that you don’t have other high-interest debt outside of your mortgage.
Your LVR is too high
One of the most important factors a lender will consider when you apply to refinance your home loan is your loan-to-value ratio (LVR).
If you’re refinancing to buy an investment property, your LVR will go up, as any equity you have in your home will now be used to secure two properties. If the market has dropped since your last application and you haven’t paid off much of the loan principal, your LVR may have risen too.
If the LVR on your refinance application is too high, a lender may reject your application or ask you to take out lenders mortgage insurance (LMI).
The importance of understanding the refinancing process
Before you make a home loan refinance application it’s important to understand the refinancing process – and have a good idea of how much you can borrow. This way you’re more likely to avoid having your application rejected.
So a good starting point before applying for a loan is to always seek out a lending specialist. They will help maximise your chances of being approved by helping you get your application in order. They will also do a full upfront review of your financial position to make sure you’re applying for the right product.
At LJ Hooker Home Loans our aim is to make applying for and understanding your home loan simple.
We’re a genuine alternative to the banks, with local lending specialists who offer personalised home loan guidance to help you make the right choice.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.