In terms of the National Credit Act (No 34 of 2005), credit providers are required to carry out rigorous checks on consumers applying for credit. This is to promote the responsible granting and use of credit and to prohibit reckless credit granting.
When you apply for a home loan, lenders are required to examine your credit record in detail, to determine whether or not it would be responsible to lend you the sum you have applied for.
In certain instances, the bank may approve a loan for a lesser amount, which may be subject to certain conditions, such as a higher required deposit.
Reasons for declined applications
There are many reasons why applications for credit are declined. The most common grounds for being denied credit are:
- You have a limited credit history: Banks may be reluctant to lend to you if you’ve never had credit before or if you don’t have enough experience with credit. Lenders want to see a solid track record of borrowing and repaying loans. When you apply for a loan they look at your borrowing history listed on your credit reports at credit bureaus.
- Your earnings are too low: Lenders want to see that you’re able to make the minimum monthly payments before they approve your loan. Most lenders use a debt to income ratio to see if you can make the payments if your loan is approved. They compare your monthly earnings to how much you spend on debt repayment. If they think you can’t afford the new debt, your application will be rejected.
- You have a recent judgment or other legal notice against your name: Serious delinquencies are a sign to lenders that either you don’t have enough money to meet your financial obligations, or you are a deliberate defaulter.
- You have negative or adverse information against your name at any of the credit bureaus. This could include late payments or defaults.
Other possibilities
- Sometimes mortgage loans aren’t granted because the bank values the property you want to buy at less than the loan amount you are applying for.
- The balances on your existing loans may be too high.
- Your credit card balances may be too high.
- Your credit card limits may be too high. Some lenders may see this as a red flag, even if you haven’t used all your available credit.
- You may have too many enquiries on your credit report. This could happen when you apply for several credit cards and loans within a short period of time. Even if some of these credit cards and loans have been granted, the lender who turns down your application may be concerned that you won’t be able to cope with more debt. Unfortunately, there’s no set number of inquiries that will prevent your application from being approved, so it’s not possible to know where to draw the line.
- You may have left out essential information on your application, like your date of birth or residential address.
- Difficulty in verifying your information. If you have recently moved or changed jobs and haven’t notified your creditors, the lender you are approaching for credit won’t be able to verify the information you provide.
- You have an unstable work record. If you’ve often changed jobs and have been unemployed at times, you may have difficulty getting approval.
The criteria employed by lenders can sometimes even result in applications by apparently creditworthy consumers being turned down. If your application for credit is denied, always ask the credit provider for detailed reasons so that you can set things right.
