Key Takeaways
- Self-employed income must be well-documented. Lenders require verifiable income via financials, ATO notices of assessment, savings, credit card, and bank statements (full-doc) or from BAS (low-doc) or an accountant letter (low-doc).
- A minimum of two years in business is ideal but there are some lenders who will accept one year’s financials.
- ATO defaults and poor credit history can cause loan rejection from some lenders..
- High debt-to-income ratios weaken applications. Keeping your existing debts low improves lender confidence.
- Recent large purchases can reduce your savings and affect your application.
- Incomplete documentation can be common mistake. Providing up-to-date and complete information is essential to an approval.
- Certain industries are treated more cautiously by lenders. If you’re in a non-traditional or high-risk field (freelance creatives, those earning from non-traditional digital platforms, etc.), seek help from a lending professional.
- Loan rejections aren't final. With the right adjustments and advice, you can reapply and improve your chances.
- Mortgage brokers like Dark Horse Financial are a valuable resource. They can match self-employed applicants with suitable lenders and streamline the process.
For many Australians, buying a home is a major milestone that many aim to reach. However, for the self-employed, getting mortgage approval can be significantly more complicated. Due to fluctuating or variable income, self-employed individuals face a higher risk of mortgage rejection compared to PAYG (Pay As You Go) employees.
Understanding the reasons why lenders may decline a loan application (and how to overcome them) is essential. This article explores the common self-employed mortgage rejection reasons, offers practical guidance, and answers frequently asked questions about what to do if your home loan application is declined.
Why Lenders Decline Loan Applications in Australia: A Guide for the Self-Employed
What are common mistakes in loan applications? Here are some reasons why applications are rejected and their accompanying solutions:
1. Inconsistent or Unverifiable Income
One of the most common reasons lenders decline loan applications in Australia is the inability to verify income. While a salaried employee presents payslips and tax returns, the self-employed may need to prove their income with:
Full Doc:
- Business Financials (Profit and Loss Statements, Balance Sheets)
- ATO Notice of Assessment
- Credit Card Statements
- Savings Records
- Bank statements
Low Doc:
- Business Activity Statements (BAS), or
- Accountant’s Letter (If Applicable)
Inconsistent or declining income patterns raise red flags. For instance, a strong first year followed by a weak second year, even if due to seasonal fluctuations, may lead to a loan rejection. Lenders prefer to see upward or stable income trends, and irregularities could make you appear risky.
Solution:
Ensure all income is properly documented. Engage a certified accountant to prepare up-to-date financials, and consider applying during a financially strong period for your business.
2. Short Duration of Self-Employment
Many lenders typically require a minimum of two years of self-employed history. If you’ve only been in business for under two years, many mainstream lenders may decline your application. You may have better chances applying with non-bank lenders or aligning with a lender who will accept your past experience in the same industry.
Solution:
If you’re new to self-employment but previously worked in the same industry as a PAYG employee, some lenders may consider your history favourably. A mortgage broker can help you identify lenders with flexible policies.
3. Poor Credit History or ATO Debt
Your credit score plays a crucial role in mortgage approval. Missed credit card payments, defaults, unpaid personal loans, or bankruptcy can all result in rejection. Unpaid ATO tax debt can be another red flag for some lenders.
Solution:
- Pay off outstanding debts, especially with the ATO.
- Make repayments on time and maintain account in good conduct.
Some non-bank lenders may consider your application even with previous credit issues, but interest rates and loan terms may not be ideal.
4. High Debt-to-Income Ratio (DTI)
A high DTI ratio—where a large portion of your income goes toward existing debts—can lead to mortgage rejection. Most lenders in Australia prefer a low DTI ratio, although this varies depending on the lender’s policies.
Solution:
Reduce your credit card limits and pay off personal debts.
5. Recent Large Purchases or Credit Applications
Applying for other forms of credit (like car loans or credit cards) before or during a mortgage application can negatively affect your credit file and signal that you may be financially overcommitted.
Likewise, recent big-ticket purchases (vehicles, expensive equipment, travel) can reduce your liquid savings and impact your application.
Solution:
Hold off on applying for any new credit or making large purchases before applying for a mortgage.
6. Property Issues or Low Valuation
Even if your financials are strong, the property itself can be the reason for rejection. If the bank’s valuation comes back lower than your estimated valuation, your loan-to-value ratio (LVR) increases, potentially beyond the lender’s comfort zone.
Other issues could include:
- The property is in a remote area.
- It’s a studio or a small apartment under 50m² or a large acreage property.
- It’s in a high-density development with lending restrictions.
Solution:
Do your research on the property. Get a pre-valuation or talk to your broker about any red flags with certain types of real estate.
7. Incomplete or Poorly Prepared Documentation
Submitting incomplete documentation is a surprisingly common reason for rejection. Missing BAS statements, out-of-date tax documents, or incorrect application details can all delay or derail your approval.
Solution:
Double-check all application forms. Ensure you include all required documents and that they’re recent. Consider working with a professional to help gather everything.
8. Unfavourable Industry Type
Some lenders apply stricter scrutiny to borrowers in certain industries. For example, freelance creatives, entertainers, adult industry workers, or those earning from non-traditional digital platforms may find mainstream lenders reluctant to offer finance, even if they meet all the financial criteria.
Solution:
Find a lender or mortgage broker familiar with your industry. There are lenders more willing to assess applications on a case-by-case basis, rather than relying on strict industry risk profiles.
What to Do If Your Home Loan Application Is Declined
Getting a loan declined in Australia is discouraging, but it’s not the end of the road. Here’s how to reapply after your loan was declined:
- Request Feedback: Ask the lender why your application was rejected. Knowing the reason for rejection can help you fix errors when you reapply.
- Consult a Mortgage Broker: Brokers like Dark Horse Financial have access to a wider panel of lenders, including those who specialise in self-employed and complex loan applications.
- Wait and Reapply: Don’t rush to submit a new application. Address the reasons for your initial rejection first, then apply with a stronger profile.
How Can I Improve My Chances of Getting Approved Next Time?
If you’ve been knocked back once, here are some practical ways to improve your profile:
- Seek help from an accountant and a mortgage broker to ensure your servicing capacity align with lender expectations.
- Minimise discretionary spending in the months leading up to your application.
- Opt for a low-doc loan if traditional documentation isn’t available (some lenders accept BAS or an accountant’s letter for verifying income).
What Lenders Look for in Successful Loan Applications
Understanding what lenders are looking for can significantly increase the chances of a successful application.
- Consistent Income and Financial Stability: Lenders want to see a reliable and ongoing income stream. For self-employed applicants, this means providing up-to-date documentation that reflects consistent income.
- Clean Credit History: A strong credit score is essential. Late payments, defaults, or multiple credit inquiries can indicate financial stress and reduce your chances of approval.
- Genuine Savings: Having a deposit made up of genuine savings (funds accumulated over time) demonstrates financial discipline.
- Low Debt-to-Income Ratio: A lower debt-to-income ratio shows that you’re not overextended and can handle new loan repayments comfortably.
- Business Viability: For self-employed applicants, lenders assess the long-term viability of your business. They may look at how long the business has been operating, industry trends, and cash flow patterns. A proven track record in a stable or growing industry is a strong positive.
Frequently Asked Questions
Why Was My Loan Declined?
Common reasons include low income, poor credit history, high existing debts, short self-employment history, or a property that doesn’t meet lender guidelines.
How to Reapply After Your Loan Was Declined?
If your application has been denied, contact a mortgage broker. If the rejection was due to poor lender selection and policy fit, Dark Horse Financial can usually rectify this by guiding you to the right lender and managing your application correctly. If there’s a specific issue that can’t be resolved by a broker, make sure to deal with that before reapplying.
Can I Reapply After a Mortgage Rejection?
Yes. But be strategic – multiple applications in a short time can hurt your credit score.
Does ATO Debt or Bad Credit Affect Loan Approval?
Most residential lenders don’t check ATO debt. However, if the ATO has lodged a default on Creditorwatch or Equifax, your application will be affected. As for bad credit, this will depend on your individual situation and if you’ve been guided to the right lender. It’s important to select the right lender for your circumstances.
Final Thoughts
Being self-employed in Australia shouldn’t be a barrier to home ownership, but it does require extra preparation and understanding. Knowing why lenders decline loan applications in Australia can help you avoid the common pitfalls that lead to rejection.
If your business is healthy, your documents are in order, and you work with a knowledgeable mortgage broker, there are plenty of opportunities to secure a home loan, even after a previous rejection.
We’ll Help You Reapply After Loan Rejection
Whether you’re recovering from a rejection or looking to make your first application, our team can guide you through the process, match you with the right lender, and give your application the best possible chance of success.
Disclaimer: Loans and the benefits of loan products are available to approved applicants only. Information on this page is general in nature, it does not take into account your personal situation. This information is not intended to replace professional advice and should not be relied upon for any reason. You should always seek professional advice for finance, tax and accounting matters before making a decision or taking any action.
