Investing in property can bring on immeasurable benefits if done the right way. It can help you generate good rental returns or wealth, or simply secure a home for your family. Most often a buyer seeks mortgage loans on a property when buying it. They wish their mortgage loan application to be successful in one go, however, that’s not the case every time.
One must be vigilant when submitting a mortgage loan application and not fall for the common issues that lead to application denial. Here we will discuss some important tips that will help you to avoid having your mortgage application denied.
How to Avoid Mortgage Loan Application Denial
When buying a property in the UAE, you must first decide whether you want to buy it on a mortgage or in cash. It can be challenging to buy a property when you are short on budget. To overcome this concern, buyers usually apply for mortgage home loans. For that reason, no buyer would want to face rejection on their mortgage application. If your mortgage loan application gets denied, try following these tips to salvage your chances at property buying and get your application approved.
Debt-to-Income Ratio
A mortgage loan is a major investment by the lender, they want to be sure that the borrower can be trusted in returning the payment. The lender, often a bank, calculates your debt-to-income ratio – DTI, to assess your affordability limit. In simpler words, it assesses whether you can repay the monthly mortgage instalments even in difficult circumstances.
DTI is the percentage of the mortgage applicant’s salary that goes into monthly bills. Different banks have different means to calculate your affordability limit. The core process of assessing is summing up your monthly commitments and dividing them by your gross monthly salary.
An applicant must aim for a DTI of 45% or less when getting a mortgage in Dubai. The lower the DTI, the less risky you will be to a lender. It is, therefore, important to review your monthly commitments beforehand to avoid having your mortgage application denied. Either pay off your remaining debts or raise your salary to lower the DTI.
Credit Score
Your credit score has a significant impact on your mortgage application. It is a crucial component of your application and is one of the main factors considered in approving mortgage loans in the UAE. A low credit score is one of the common reasons a mortgage loan is denied.
It may be unfavourable to your application if you have a poor financial history and a very low credit score. Below are some basic tips that can help you improve your credit score.
Tips to improve credit scores
- Pay your bills on time each month.
- Reduce the balance owed on your credit card.
- Avoid getting any new credit cards.
- Spend no more on your credit card than you can afford to pay off each month.
- Examine your credit reports for any errors.
Avoid Misrepresentation
You must avoid confusing or dishonest statements when it comes to mortgage applications or they may cause problems. Make sure you disclose your financial situation honestly. Giving misrepresentation of something you are not can result in getting your mortgage loan application rejected.
The banks conduct thorough research of your financial status to make sure that all the information provided in the application is correct. Therefore, the documents that you submit for mortgage pre-approval in Dubai must be thoroughly verified at your end. It is one of the important steps for how to avoid mortgage loan application denial.
Age Factor
To succeed in your mortgage loan application, the applicant must be at least 21 years old. There is also an upper age limit which is considered to calculate your last mortgage repayment. The maximum age for the last payments is 70 years for UAE citizens and 65 years for foreigners, according to the property mortgage laws in Dubai and Abu Dhabi.
The Stress Test
Throughout your mortgage period, the interest rates will change and won’t stay the same indefinitely. For that reason, the stress test comes into play. The stress test, like the primary affordability test, is based on your present financial status.
Mortgage lenders run a stress test on your mortgage payments to verify whether you could still repay the instalments if the interest rate increases. Each lender has their standards for the stress test.
Loan-to-Value (LTV) Ratio
Lenders estimate the loan-to-value (LTV) ratio on your mortgage application to determine the amount you are requesting in comparison to the value of the interested property. The requested amount is divided by the property’s appraised value by the lender to determine the LTV ratio.
Lenders prefer low LTV ratios because they protect their investment if the applicant is later unable to repay the instalments. Because of this, private mortgage insurance is typically required for loans with an LTV ratio of more than 80%. This insurance is paid each month along with your mortgage payment.
The best way to get a higher LTV ratio is to start saving your cash, which you used to pay your debts, once your debt-to-income ratio gets below 45%.
That’s a wrap on the tips to avoid getting your mortgage loan application denied. The aforementioned tips can help you address and resolve the common reasons why most applications are rejected. While most of you might be planning to secure a mortgage for your property purchase, you must be aware of the types of mortgages in Dubai. That said, if you haven’t yet found your dream residence, try exploring these villas for sale in the UAE.
For more information on home loans and mortgage types, stay tuned to the UAE’s leading property blog.
