Why did my mortgage get declined?

A “no” on your mortgage application can be disappointing. And frustrating.

This is why so many investors ask us: “What can I do to make sure my mortgage application gets approved?”

That's why it's useful to know why the banks have declined other investors' applications.

That way you can avoid the same mistakes. 

In this article, you’ll learn the 4 reasons why investor’s mortgage applications get declined. This way, when you’re making your next application, you’ll know the parts you need to pay close attention to.

#1 – Your property isn’t worth what you think it is

The most common reason an investor's mortgage gets declined is that their house isn't worth what they think it is.

For example, let’s say you want to buy an investment property.

To get the deposit for this, you want to borrow against your own home. Your place is worth $1 million and your mortgage is $650,000.

If you use an online calculator you might see that you can borrow up to $150,000 against your own property. And you can use this as the deposit for an investment property.

That means you could potentially buy a $750k new build.

So you go and sign a contract to buy one.

As part of approving your mortgage, the bank may ask you to get a valuation on your own home.

This is to prove to them that your home is worth what you said it was.

But what happens if the valuer says your own house is worth $950,000?

Now you can’t borrow as much against it, and you won’t be able to buy the $750k new build.

To buy that property, you'll have to find more money somewhere else.

Key message:

• When you apply for finance, be conservative with your property’s values
• A valuation doesn’t always go your way. So don’t always try to borrow the absolute maximum amount you could

#2 – You didn’t tell your mortgage broker about overdrafts, hire purchases and credit cards

Investors often leave debts off their applications.

These are things like an unused credit card or a personal loan.

It’s not that you’re trying to be sneaky, or lying – most of the time you’ve forgotten.

But they can affect your mortgage application.

What happens? You talk to your mortgage broker about your potential purchase. They say: “Yup, that all looks great”.

Once the application is sent off, the bank starts asking questions. Apparently, you've got a credit card that wasn’t on your mortgage application.

You might think "But I haven't spent any money on my credit card. What difference does it make?"

Banks assume the worst-case scenario.

If you have a credit card they’ll assess your application as if you've maxed it out. Yes, even if it's sitting in your wallet unused.

The reason for this is that you could. Once they approve your mortgage you could go on a large spending spree and rack up debt.

A $10,000 credit card can stop you from borrowing up to $72k. Even if you haven’t spent a cent

Same with overdrafts. A bank will pick this up on a credit report.

If you haven’t disclosed it, there are 2 effects:

1) The bank starts to wonder what else you haven't told them.

2) You might not be able to afford the mortgage once the personal loan is taken into account.

Once the bank has said “no”, it becomes hard to change their mind.

Key message:

- Talk to your mortgage broker about everything, before submitting your application.

- Mortgage brokers can advise you on ways to improve your application (e.g. cancelling your credit card). So tell them everything.

#3 – Your application was 50/50 from the start

Some mortgage applications are always going to be 50/50. Not everyone has a rock-solid chance.

Maybe you have just enough income. Maybe you have just enough deposit. Maybe you’re buying at just the right time.

With these applications, it’s a 50/50 shot. The bank may say yes. They may say no.

Your broker will know this before sending it off.

So, your broker will say something like this: “Your application is borderline, but let's give it a go".

Some investors get frustrated when the answer is no.

The important part is to listen to both parts “your application is borderline” and “let’s give it a go.”

Don't just hear: "let's give it a go."

The key message:

- Make sure you are mentally prepared for your application to come back as a no.

- Chat with your broker about the likelihood that your mortgage application will be approved.

#4 – Your don’t earn what you said you earn

As unbelievable as it may sound, some people don’t know what they earn.

For instance, a pair of investors we were working with here at Opes Partners overstated their income by $150k a year.

You might think “How the heck does that happen?”

They were self-employed.

Business owners often have their whole financial life entwined with the business. So, money lines become blurred. So they may not know the exact amount they earn.

This is especially the case if you are a contractor.

But just know, once you send your financials off to your bank, they will check. They will go with a fine toothcomb.

If you do own your own business, are a freelancer, or a contractor, be precise.

Don’t just write any old number down as your income. Find out exactly what you earn from your accountant.

Here’s another example to show you how often this happened.

Recently another investor came to Opes. They said they worked a full-time job getting paid $40 an hour.

A full-time job is 37.5 hours. That means this investor earned $ 78,000 a year. Or at least that's what it looked like.

Once the application got sent off to the bank the borrower had to prove their income. That’s normal.

But it turns out that this person only worked 30 hours a week. That means their annual salary is $62k. $16,000 less.

It’s not that investors meant to tell a fib. They really thought they worked full-time.

But once a bank has said no… it’s really hard to change their mind. And it’s easy for investors to get disheartened when the bank says “no”.

If you don't have enough income there can be solutions:

• Your broker may suggest going for a cheaper property.
• Or you could have talked to your boss and discussed full-time hours.

Key message:

- Be precise with your income

- If you are a business owner or are self-employed, check with your accountant to see how much you earn

How do I get a “yes” from the bank?

The best way to get a yes from the bank is to tell your mortgage broker absolutely everything. 

That way they can help you get your mortgage application in shape so the bank will say yes. 

Mortgage brokers are your link to the bank.

They’re the person in the know, who’s going to give you the absolute best shot at getting a “yes”.