How long should you wait before you reapply for a mortgage?

If you've decided the time has come for you to buy property, be it a new home or an investment, it would be a bummer if some bank were to deny your home loan application.

If that's happened to you, there are a couple of ways you can move forward.

You could take the rejection as a personal affront and start planning revenge against the bank that wronged you. Or you could figure out what went wrong and address the issue before trying again.

You won't find advice here on how to go about armouring your killdozer. But, if you're looking for more information about how to go about reapplying for a mortgage, there are a few things you should know.

Why home loan applications get declined

Home loan applications are generally denied whenever a lender isn't convinced a borrower has the ability to pay the loan back.

This might be due to a poor credit history or existing outstanding debts, or simply because the borrower just doesn't have a large enough income to afford home loan repayments on top of their living expenses.

To make things harder, lenders also typically stress test home loan applications using the serviceability buffer, which is currently 3%.

That means, if you're applying for a mortgage with an interest rate of 6% p.a, you'll need to demonstrate you could pay the loan off if that rate were to rise to 9% p.a.

Read more: Creating the perfect home loan application

Even if everything looks solid on the application, that still isn't a guarantee.

George Samios, mortgage broker at MADD, says that when his clients are kicked back, it's usually because of something he or his client can't see before applying.

"For example…we take a customer to Commonwealth Bank for pre-approval, we can see no issues from doing a credit check, but when we apply with the lender they can see that the client has poor conduct on a credit card from five years ago," he told Your Mortgage.

Home loans declined after pre-approval

Even if you've received pre-approval for a home loan, you may still be kicked back if your circumstances change between the time you receive pre-approval and when you actually need the money.

There are lots of potential reasons this can happen:

• Your finances changed
  For instance, you might have taken a lower paying role or cut back your hours at work

• Your credit score took a hit
  You may have been rejected for another loan or missed a repayment and dented your credit score

• The lender's criteria has changed
  Unfortunately, a lender might simply change its policy to exclude borrowers who previously would have qualified

• Interest rates changed
  If you were pre-approved for a home loan and interest rates went up before you secured the mortgage, you might be deemed unable to service the loan at a higher rate

For all these reasons, it's sensible to always include a 'subject to finance' clause in a contract of sale for a property, even if you've received pre-approval.

If you sign a contract stating you have a legal obligation to buy a property and later get rejected for the home loan you need to do so, it can cause major problems. The seller could even sue you for any losses they incurred because you breached the contract.

When to reapply for a home loan in Australia

How long to wait after being turned down for a loan depends on why you couldn't get the loan.

In some circumstances, you might be able to immediately reapply, just with a different lender.

Take the above hypothetical where Commonwealth Bank rejected the borrower because of an old default on file. In that case, Mr Samios said he would take his client to another lender right away.

"Their credit file is fine, Commbank could just see old facilities with bad conduct in their system," he told Your Mortgage.

He said there are often situations in which he is able to reapply on a client's behalf right away.

"If one [lender] has declined because of a policy issue but another bank hasn't got that policy issue you can apply the same day," he explained.

"We just need to be sure to tell the new lender the old application did not proceed."

If you can reapply successfully straight away, that's great. But remember that every application is recorded on your credit history. Lenders might not like it if you have too many applications on your credit file, and a mortgage broker can be invaluable in helping you understand whether this applies to you.

If there aren't simple fixes, you might need to wait longer and take additional steps before reapplying.

What if a home loan is declined because of credit issues?

One of the most common reasons a home loan is declined is because of a patchy credit score.

If you have a history of late loan repayments or even defaults, it will likely raise concerns about your creditworthiness.

Per Equifax, this is how long information stays on your credit file:

Information	Kept on file for:
Repayment history	Two years
Credit enquiries, overdue accounts, writs and summons', court judgements	Five years
Overdue accounts listed as 'serious credit infringement'	Seven years

If your dodgy credit comes from a pattern of irresponsible financial practices, you might need to change your behaviour before reapplying.

This might involve cutting back on extraneous spending to make sure you never miss a bill or cancelling excess credit cards.

When you're trying to rebuild your credit score, it can also pay to be cautious about when you go to reapply. Remember that those 'hard' credit enquiries, including that needed for home loan pre-approval, are recorded on your file.

Thus, it's sensible to wait until you're confident of your chances of acceptance, rather than spraying applications all over the place. Again, a mortgage broker or financial advisor can be a big help in determining when you're ready.

If your credit score has been damaged by one previous debt you defaulted on, Mr Samios recommends engaging the services of a credit repair lawyer.

"[The lawyer] will make you repay the debt and try and get the provider to remove the default," he said.

"Once it's removed your credit should be repaired immediately….usually [this] is a 1-2 month process, depending on the default."

Read more: Checking your credit rating

What if a home loan is declined because of outstanding debts?

Another red flag, in a lender's eyes, is if you have too much debt in relation to your income.

Lenders often have a mandatory debt-to-income ratio (DTI) - if you're applying for a home loan that would put your DTI above a lender's threshold, your application will be automatically referred to its credit department.

It might seem fatuous to point out, but there really is a simple solution: pay your debts.

There're a few popular strategies for those struggling with multiple debts.

A debt consolidation loan combines all you owe into one facility, which can make debts easier to manage. Although, it won't necessarily save you money on interest.

Another strategy is the 'snowball' method. This sees you making minimum repayments on all of your debts except one. On the smallest, you devote all your extra disposable income to paying it off. You then move your attention to the next smallest, and so on, until you've cleared the debts in your way of a home loan.

This method can be psychologically helpful as you tend to get a boost of confidence from paying off one debt, and can start to build momentum (like a snowball).

What if a home loan is declined due to income and expenses?

The most simple reason a home loan application can be declined is because a borrower just can't afford it.

If you're looking to take out a home loan in excess of your borrowing power, you'll likely be disappointed.

In such cases, you have a couple of options. You could settle on buying a less expensive house or you could wait until you're in a stronger financial position.

It probably doesn't sound helpful being told you 'just need to get richer', but there are a couple of practical ways you can improve your borrowing power without receiving a huge promotion.

Firstly, saving up a bigger deposit reduces the amount you'll need to borrow, and can also mean you qualify for a lower interest rate (since your loan-to-value ratio (LVR) will be lower).

You could also take a look at your spending. Your borrowing power is based on the gap between your income and your expenses, after all.

If no boost to your income is forthcoming, you could try the other side of the equation and cut back on unnecessary costs. However, lenders usually use the Household Expenditure Measure to establish a 'baseline' for your assumed expenses, which means there are limits to how much difference frugality can make.

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If you're confident you've addressed your issues and are ready to jump back in, these are some of the owner occupier home loans available in Australia at the moment.

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