Even before you finalise your home, it is evident one needs to conduct extensive research regarding the different types of lenders, the interest rates, and so on. Since a home loan is a crucial loan that can last for over two decades, you must also take all the precautions to ensure your home loan is not rejected.
From the lender’s perspective, mortgage is a significant investment and the lender wants to be sure that their money is going to someone they can trust to pay it back. When it comes to reasons for rejected mortgage applications, there are some specific issues that crop up regularly. Many of these can be avoided if thought about in advance and addressed.
Here are nine of the most common reasons for home loan rejection that you should be aware of, if you intend to take a home loan, based on research by UAE's top mortgage consultant Mortgage Finder, which is a part of the Property Finder Group, and other property loan advisors and financiers:
Reason#1 – If borrower does not prove the pre-requisite affordability
Debt-to-burden ratio, or DBR, is a measure by the bank to see that you can meet your monthly mortgage repayments. You have to inform your lender of the other loans taken, including your car loan, a two-wheeler loan, a personal loan and so on. This helps the lender evaluate your loan to income ratio. The total loans taken by you, including the home loan, if approved, should not exceed 50 per cent of your monthly income.
Lenders often reject home loans if the loan to income ratio exceeds half your monthly income. However, you can apply for a home loan as a joint loan, by including your family income (income form spouse and children) for it to be approved. So, prior to applying for your mortgage it’s worth reviewing your liabilities to ensure the approval process is smooth. Once half your salary easily covers your regular liabilities, you know you are in the right place to consider the application.
Reason #2 – Borrower’s age, nationality during the time of the application
There are two basic scenarios why a home loan application gets rejected; if the borrower is a freshly employed or if his age is close to retirement, when he applies for the home loan. Lenders are often hesitant to approve loans for such individuals since they can’t accurately assess the borrower’s repayment capacity. While a fresher typically has a lower income, an individual who is close to retirement may not have the capacity to repay the loan, when his sources of income diminish.
How old you are and where you come from are both factors you cannot change, but it’s important to realise that both can affect your application. In terms of age, you must be at least 21 to apply for a mortgage in the UAE. There is also an upper age limit set by most banks, in most cases your final payment will be due before you turn 65 if you are an expat employee, and by the time you are 70 if you are a UAE national or a self-employed individual.
Where you come from is also a factor. There are some countries that are sanctioned and the UAE banks are unlikely to lend to nationals from these countries except in exceptional circumstances. The list of sanctioned countries is subject to change and is not the same for all banks.
Reason #3 – Failing the lender’s stress test
Interest rates will fluctuate over your mortgage term, and your fixed rate won’t last forever. Mortgage lenders want to know that you can handle the mortgage payments even if the interest rate increased. To check this, they will perform a stress test on your mortgage repayments, this considers what the repayments might be if the interest is higher than it is today.
Like the main affordability test, the stress test is measured against your current finances. It’s set at different levels for different banks but can be substantially higher than your actual rate. Stress testing is a normal part of the mortgage process in most countries, including the UAE. The banks want to make sure that even in the worst possible circumstances, you can still make the monthly mortgage repayment, and this means that affordability is a key concern for them.
Most UAE banks score their affordability calculations based only on 50 per cent of your income to take into account a drop in income, difficult months, or sudden unexpected important outgoings. While this conservative approach to the loan criteria can make the initial application more challenging, it does give both you and the banks the security of knowing that the mortgage won’t put too much strain on your finances, even if times get a little harder – like in the current pandemic.
Reason #4 – If the borrower has a history where employment has been unstable
As home loans generally last for very long tenures, it comes with long-term responsibility. Frequent job changes, with periods of unemployment, can affect your home loan eligibility. You need to be employed for a minimum, continuous period of three years with the current employer for your home loan to be approved. If you are employed for a longer period of time, the lender has the guarantee that you have the repayment capacity to pay off the loan within the stipulated tenure.
Reason #5 – Making the mistake of misrepresentation or incomplete documentation
Accuracy is a crucial factor in your mortgage application; if you are found to be unclear about your circumstances, it can cause issues. Make sure that you disclose your circumstances clearly. Mistakes like suggesting you are a company employee when really you are a self-employed individual who owns the company, for example, can be costly. The banks will do their due diligence and research you, so disclose all key information in a correct and clear fashion.
Reason #6 – Borrower has a weak credit history in relation to sought loan amount
In many countries around the world, your credit score has a big impact on your mortgage application. In Dubai and the UAE, your credit score also forms an important part of your application and is a key factor taken into consideration. The credit report comprises a complete record of your previous loan applications, including those that are rejected. It is therefore better to know your results from one bank before you apply to another for a loan. This will help you correct you mistakes and ensure you do not repeat the same, when you apply for the loan a second time.
If you have a poor financial history and a substantially low credit score, then this may adversely affect your application. Time is the key factor in improving a credit score. Experts suggest putting as many months between you and the last default or mistake as possible to show improvement. Remember that credit histories are not moved from one country to another, so your score may not line up exactly to that of your home country. Also, a blank score that indicates no activity in the country at all can often be as bad for a lender as a negative one – after all, it means they have no idea if you’re a responsible borrower or not.
Reason #7 – If the borrower has served as a guarantor to a defaulter
Another reason your home loan can be rejected is if you have served as a guarantor to a loan defaulter. You must be extremely careful before you decide to be a guarantor to anybody as it can sometimes prove to be risky for you, especially when you yourself need a loan. You need to be completely sure of the repayment capacity of the borrower before becoming their guarantor. Do not sign up to be a guarantor for a borrower you do not know. If the borrower fails to repay his loan, you are not only held responsible and made to pay the remaining loan amount on their behalf, but it also affects your own credit behaviour.
Reason #8 – Lenders valuing your property lower than you
If the bank values the property you want to purchase for less than you have offered to pay, there could be a discrepancy in the mortgage available that can make the final transaction difficult. This can lead to an increase in your down payment or the sudden need to renegotiate price with the seller.
Lenders often verify if the property taken on loan is approved by local bodies. In case the property is unapproved, or if it fails to adhere to certain guidelines as prescribed by local authorities, the loan can be rejected. Furthermore, lenders are often hesitant to provide loans for purchasing older properties as they do not typically have good re-sale value.
There could be situations when you may have an approved property but your lender doesn’t approve of the builder. Home loan rejections are common in such scenarios. Therefore, you must check with the lender about the list of builders approved by them before applying for the loan.
Reason #9 – Borrower unaware of any related business and company background issues
Your employment is of key importance to lenders in the UAE and many things regarding your employer or your business, if you own a company, can affect your application. Some areas that the bank might take into account when looking at your employer or business, include company reputation, including any negative media or bad press, established history of the company, company size and projected stability, financial standing or industry in which the company operates.
Banks are most comfortable lending when they know the company you are affiliated to is stable and has a stable future. If you are in a position to affect your company (as the owner, for example) then you may want to consider making improvements, like having clear financials, before applying for a mortgage. If you are an employee and your company is in poor standing, then you may wish to look at alternative work options – of course, remember that stable employment and the length of time you have been at a company are also factors that will be taken into account.