Is Being Denied a Mortgage Hurting Your Credit Score?

Rejection of your home loan application can impact your credit score and the process can be reflected in your credit history. But fear not, because there are ways to fix this and put yourself in a better position to get your mortgage approved.

Any request for a credit product may have an impact on your credit score. When you apply for a credit product, such as a credit card, personal loan, or home loan, the provider will need to perform a thorough credit check on your credit.

This is done to determine if you can comfortably service the credit product based on your credit history. And if the lender determines that you are not a suitable client, they may reject your home loan application.

Although a home loan denial won’t necessarily lower your credit score, rigorous credit checking will still be on your credit history. And if you then continue to frantically apply for even more home loans without rectifying what caused your first application to be rejected, you will have several rigorous credit checks on your credit history.

We know this can hurt your credit score and cause more credit grantors to reject your applications, as this type of behavior is considered risky and “credit greedy”.

So if you’ve been rejected for a home loan application and are worried about your credit history, it’s worth delaying a second application and improving your financial situation and credit score first before apply again.

How to Recover After a Mortgage Denial

Steps to follow following a mortgage refusal:

  1. Delaying demand for future home loans
  2. Investigate why your application was rejected (bad credit, outstanding loans, etc.)
  3. Take a copy of your credit history and review any errors or explanations
  4. Work to improve your financial situation and credit score
  5. Add positive events to your credit history

A mortgage application rejection is not the end of your home buying journey. Instead of reapplying for a mortgage immediately, it’s time to identify why your application was rejected in the first place so you can increase your chances of approval next time.

Some of the most common reasons a home loan application is rejected include:

  • You have adverse events in your credit history, such as defaults or late payments. exceeding 14 days.
  • You have existing liabilities that have limited your ability to borrow, such as a car loan, an unpaid credit card balance, or even HECS/HELP debt.
  • You don’t have “real” savings which indicate that you can budget and save your income.
  • Interest rates have increased and you can no longer comfortably manage the loan balance you requested a higher rate.

If you think your rejected application is the result of your credit history or if you’ve never reviewed your credit report, it’s time to request a copy of your credit history. The Australian credit bureaus, Experian and Equifax, can provide you with a free copy of your report once a year.

If you’re just looking to review your credit score, RateCity’s Credit Score Center can provide you with your scores for free in seconds.

Review your credit history and carefully review all listed events. Make sure there are no errors, such as a family member’s information mistakenly added to your record. You might be surprised to see what events have been logged that you may not be aware of, such as a late payment for a utility bill shared with a partner.

Negative events in your credit history can help lower your credit score, but they don’t last forever. Here’s how long adverse events can stay in your credit history:

  • Repayment history – 2 years
  • Credit applications and inquiries – 5 years
  • Writs, subpoenas and court judgments – 5 years
  • Defaults – 5 years
  • Bankruptcies, debt agreements and personal insolvency agreements – 7 years

In some situations, homebuyers may have to wait for these events to clear from their credit history before their credit score improves.

Fortunately, there are positive events you can practice that should reflect in your credit history and could improve your score, including:

  • Repay outstanding loans and credit card balances. For credit cards in circulation, it’s worth considering making more than minimum repayments as well.
  • Make your credit payments on time, including phone bills and utilities. Consider automating your payments as direct debits to avoid late payment penalties.
  • Set a budget to save your income consistently over time.

It can take several months to get your financial situation back on track, so be realistic about your timeline and goals. But it’s worth taking the time to work on your application and suitability as a mortgage borrower before applying to another mortgage lender.

The last thing you want to do is have multiple consecutive credit checks and rejections. Increasing your chances of getting the next home loan approval is one of the best things a buyer can do after a mortgage loan rejection.