Applying for a home loan can be a daunting task for many buyers, particularly for those who employ a do-it-yourself approach. As a borrower, you will need ample time to prepare your finances and other documentary requirements before taking the plunge.
Here are some mistakes you should be aware of when applying for a loan.
1. Making too many home loan applications
While shopping around is an important part of looking for a home loan, it does not mean that you should apply for multiple lenders. Do not ever go loan-fishing — whenever you file an application to a lender, it gets recorded on your credit file. The bad thing is the lenders you applied to will surely notice that you have been submitting applications to other financial institutions.
They might think you got rejected from all your other applications and will be a bit suspicious of your actions. As a result, all these lenders might turn you down.
There is nothing wrong, however, with comparing home loans. The market is teeming with home loan offers, each with its unique advantages and disadvantages. But only a handful will actually meet your needs. It is your role to shop around and see which one best suits your current financial situation. A mortgage broker can help you find the right loan product, but the responsibility of knowing what you need falls on you.
2. Forgetting to check and review your credit report
Your credit report can dictate the fate of your home loan application. Not being able to check your credit report could ultimately result in you wasting all your efforts in preparing and submitting your home loan application.
Lenders use your credit report to assess your credibility as a borrower - your credit history paints a vivid picture of your attitude towards your finances. Even if you do not check your credit report, your lender will be able to access it.
What do they find in your credit report aside from your credit score? There is a lot. Lenders will be able to examine your loan enquiries over the last five years, the details of any current debt you have, the names of credit providers you have applied for, and the number of times you opened and closed credit cards, loans, and postpaid mobile plans.
The recent changes in the credit reporting system will now also allow your lenders to see the type of credit products you held in the last two years as well as the amount and frequency of your payments. Credit limits will also be included in your report.
However, the two most crucial things that could raise eyebrows in your credit report are overdue balances and missed payments. If lenders see such marks, you will be immediately tagged as high-risk and your borrowing power may be severely diminished. You can even get an instant rejection if your lender has stricter-than-average rules when it comes to credit history.
It is of great importance, then, for you to check your credit report before applying for a home loan. Some negative marks in your credit report might not be your fault at all and could be just an honest mistake by your credit provider. You would not want to be turned down for something you did not do.
To ensure that your credit report is spotless, see to it that you immediately take note and address any outdated personal information, repeated debts, inaccurate debt records, erroneous credit defaults, and doubtful accounts.
3. Shutting down a credit card account
If you have huge credit card debt, closing an account will not necessarily improve your credit score. Yes, there are situations where closing a credit card account is a smart move. However, it will not do you any good if you need a mortgage. If you get rid of a credit card, thereby reducing your level of available credit, your debt-to-credit ratio could rise while your credit score could drop.
4. Taking on additional debts
At the same time, it is also not wise to overuse your credit cards prior to applying for a home loan. Exceeding your credit card limit or swiping your card too often can also affect your credit score. Doing so will lower your credit score and raise your overall credit utilisation ratio – the amount of credit you have used compared to the amount of credit available to you. To keep this ratio as low as possible, you should limit credit card use before applying for a mortgage.
In essence, racking up debt before applying for a mortgage will increase your debt-to-income ratio – how much debt you are paying off compared to how much money you are making – which is one of the factors lenders are looking at to measure your ability to make mortgage repayments. If you have debts that are six times higher your income, you will be considered a risky borrower. This means two things: either your lender will offer you a not-so-ideal offer or they will straight out reject your application.
5. Depositing large amounts before application
Banks want their borrowers to have savings - this tells them a lot about their clients' financial health. If you are applying for a home loan without a considerable amount of funds stashed in your savings account, then do not expect your lender to give you a call.
But if you think it’s a wise move to deposit in bulk before applying for a home loan in the hopes of showing your lenders that you have significant savings, think again.
Before applying for a home loan, you will need to document every single transaction in your savings and credit accounts. Your lender would be very distrustful if you did not have an explanation for the large amount deposited into your account. Record everything and ask your mortgage broker to help you with explaining the transactions to your lender.
6. Not knowing lending criteria
Lenders and the mortgage insurers behind them work to a wide range of criteria when deciding whether to approve a home loan.
They often have restrictions around property sizes, postcodes, high-density buildings and an assortment of other aspects. For example, many lenders put restrictions on the maximum amount they will lend on properties in regional towns, meaning you may need to come up with a larger deposit.
Do your best to make sure you know what rules you have to work by before heading out on the hunt – otherwise you could find extra conditions on your loan or your application denied altogether.
The simplest way to do this is to seek out a home loan pre-approval before looking for property. However, not all pre-approvals are equal to others: Aussie Home Loans spokesperson Brooke Stoddart advises that you should ensure you get a 'fully assessed' pre-approval.
"Some lenders issue an automated pre-approval without any assessment," Ms Stoddart said.
"This usually has a page of disclaimers and is pretty worthless."
7. Not shopping around
Simply not considering all your options in the first place could derail your application. Different lenders offer vastly different loan amounts: Lender A may lend you $330,000, while Lender B will offer $370,000 and Lender C may not approve your home loan at all. Always compare home loans.
Therefore, it's important to be proactive once you've done your figures and know what you can honestly afford: don't limit your search to just one or two lenders.
It’s important not to take on the largest loan you can either, as you may quickly find out that you are stretched beyond your limits. Make sure you’re aware of what commitment you can comfortably manage, with interest rates at this level and a couple of percentage points higher.
Yourmortgage provides guide on choosing a home, click here to view.
8. Not having a big enough deposit
Many years ago, it was possible to buy a house without having to put any money down. However, the days of 100% home loans are gone, and almost all lenders require a home loan applicant to have a genuine savings deposit of at least 5% of the purchase price. Sometimes a lender will require even more.
While this may not be a problem for investors looking to leverage equity in their existing home, it can present problems for first-timers pulling together cash for an investment – especially when you factor in extra purchase costs, which you may or may not be able to work into your loan amount.
The answer? Do your homework. Educate yourself about the market before you start looking for a property and get a handle on how much you really need before committing to a purchase – and then add a buffer of at least 5% on top. This applies whether you're using equity to fund the deposit or putting in hard-saved cash.
9. Not understanding all the costs of buying a home
There are a wide range of purchase costs in addition to your deposit, including (but not restricted to): Lenders' Mortgage Insurance (LMI), stamp duty, legal costs, application fees, solicitor fees and inspection fees.
It's easy to forget all the fees that mount up, and they can easily derail your cash flow projections.
It might be a good idea to speak to friends, family, mortgage brokers or real estate agents, as they can help advise you about the costs you need to pay – and those you don't. They'll also be able to give you an insight into ongoing costs, such as land rates, strata management costs, maintenance, insurance and property management.
10. Paperwork snafus
It's a simple thing – but an important one. The paperwork that lenders require can be significant, and it is important to get it right: sending in your home loan application without the documentation required by the lender can result in the loan application going back and forth to the lender a number of times without result.
At worst, not having the right paperwork to hand over can derail purchases altogether.
Using a mortgage broker to handle the paperwork is probably the quickest and simplest way to ensure you get it right: however, if you're going it alone, be sure to read the lender's instructions very carefully several times. Remember, if you're putting in a joint application, you'll need to provide evidence for each applicant.
You should also make sure you send in the documentation that the lender asks for, not substitutes: Aussie Home Loans often sees clients who repeatedly send in other documents than the ones requested, such as ATO Tax Assessment Notices in place of group certificates or bank statements showing pay being deposited in place of pay-slips.
11. Not declaring all your expenses
Forgetting to mention something like an emergency credit card is also a common problem, and one that can derail an application, says Justin Doobov, managing director of independent mortgage broker Intelligent Finance.
"I have seen some clients not disclose their five credit cards – or even expenses relating to their kids – when they come to us,” Mr Doobov said.
“Of course, when we get their bank statements we see all the payments to the various credit card companies, child care expenses and school fee payments for the kids.
"If a lender sees this, it is likely they will decline the loan due to non-disclosure. It's best to be honest, upfront and get an approval that will be honoured."
12. Significant employment changes
Life events can drastically impact your mortgage application. Changing careers is one.
Lenders usually require their borrowers to have steady employment to ensure a constant source of income. If you have recently switched jobs, your chances of getting a home loan will decrease. It is usually not a good sign for these lenders if applicants are new to their job — they typically tag these people as unstable, which means they have higher chances of defaulting on the loan.
It is highly recommended that you do not make any sudden career changes before applying for a home loan. If you are new to your job, then it is better to wait for at least six months to one year to increase your chances of getting approved.
Factors that can impact your mortgage application
Applying for a home loan is a long and complicated process, involving everything from credit and reference checks, to the verification of your employment history and income.
As the law requires your lender to lend you money responsibly, they’ll need to perform a thorough background check to ensure that you’re qualified for the loan you’re applying for.
Here are some of the areas lenders will look into:
- Your income (including bonuses, allowances, rental income, and the like)
- Your employment history
- The number of places you’ve lived in over the last few years
- Your savings history
- Your loan repayment history
- Your credit history and credit score
Why your credit history and credit score matters
A credit report (also known as a credit history report) is essentially a snapshot of your borrowing history. Every time you apply for a loan, credit card, or mortgage, information about these repayments is compiled as part of your credit history, even if the application is denied.
The information in your credit report is used to work out your credit score (or credit rating). Credit scores range from 0 to 1200, with 0 being the worst and 1200 being the best. Your credit score ranks your credit history against those of other Australians.
Lenders can access your credit history via the two main credit reporting agencies: Veda and Dun & Bradstreet. These agencies collect data from numerous sources, including all types of lenders, telephone companies, and debt collection services.
To increase your chances of getting your mortgage application approved, you’ll need a clean credit history.
Keeping your credit history spotless
It’s best to subscribe to a credit file or identity monitoring service, such as Veda Access or Identity Watch if you’re serious about monitoring your credit history. These services cost around $100 annually, but can give you greater peace of mind, knowing that your credit history isn’t reflecting something that it shouldn’t.
If you’re notified of a change that has been made without your knowledge, you can promptly take action to fix the mistake to avoid having your mortgage application unfairly rejected.
Boost your chances of approval by paying off your debts
Whether you want to take out a loan to buy a property as an owner-occupier or for investment, the fact is high levels of debt can impact your borrowing capacity, according to Paul Thomas, CEO of Gateway Credit Union.
“Lenders want to be sure you will be able to repay the loan without overextending yourself, and they assess your loan application on three things; your income, your living expenses and your current level of debt,” said Thomas. “If your debt level exceeds a certain percentage of your income, it will be extremely difficult for you to secure a home loan for the amount you want.
“Everything from credit cards, car loans, personal loans and existing home loans are taken into account and may reduce your ability to borrow. If you’re planning on applying for a home loan, it’s recommended you pay down as much debt as you possibly can ahead of applying.”
You can use our How Much Can I Borrow? Mortgage Calculator to help you determine your borrowing capacity. This calculator allows you to plug in your information regarding your income, expenses, and debts to show you how much you can borrow. By getting your finances in order and planning ahead, you’ll increase your chances of getting your application approved.
What to do if your home loan application is unsuccessful?
If you were not able to avoid the mistakes mentioned above and you end up not getting approval, then you should immediately assess your lapses. Here are some things you can do if your application was not approved:
Chat with your lender
Your lender knows what makes an application successful. There are several reasons why a loan application may be declined. By speaking with your lender, they will let you know what lapses you had, and they can also give you an idea on what changes you need to make before applying for another home loan in the future.
Revisit your credit report
Your credit report is one of the most important factors lenders look at when assessing your application. It is important to check your credit report to see if there are any defaults and to make sure there is no incorrect information.
Defaults will need to be paid for most loan applications to proceed. Paid defaults can still portray a negative image of you, so you will need to have a detailed explanation of what happened.
Check your finances
If your home loan application is declined, it does not mean you have to completely change how you manage your finances straight away. Learning how to effectively manage your finances may take some time and should be done gradually. You will need to look at all your financial commitments and see what changes you can make.
A simple budget can make all the difference as it will help find any extra money which you can put towards paying off other debts and your savings. It is extremely important for you to make all repayments in full on time as it will stop any defaults from appearing on your credit report.
It might be a good idea to speak with a mortgage broker who can help you in your next attempt to apply for a home loan. A mortgage broker will be able to help you iron things out before you submit your application, saving you time and effort.
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