No one likes rejection, do they?
Whether it's being turned down for a date or not getting your dream job, being rejected doesn't make us feel any good.
The thing is, while you can't do much to make someone choose you for something subjective like a dinner date, you can make yourself more attractive to banks to improve your chances of them saying "yes" instead of "no".
Let me explain....
Banks use set criteria when they're assessing a potential borrower's loan application.
Unlike asking for a date, it doesn't matter whether the bank likes you or not.
It matters whether you are assessed as a borrower who has the money management skills and the regular income to repay the loan over a set period.
There are also number of reasons a bank may reject your application – even if you look "good" on paper.
So let's take a look at three of them, shall we?
- The wrong property
The truth of the matter is that there are some properties that lenders don't like.
Buyers of these types of properties will always struggle to get finance because banks tend to put them in the "too hard basket".
The wrong property can include small studio apartments, some high-rise developments, certain postcodes (such as mining areas), unfinished renovations, those located near high voltage powerlines and ones that are in a bad state of repair.
The thing is that no matter whether you can afford to service the loan, the lender will also consider whether it is prepared to finance a property that might be hard to sell in the future.
Let me be clear: lenders may end up having to sell your property if you default on your repayments so if the property is one that fails to sell or which may sell at a significant discount to what you paid, they are not going to get their money back are they?
- Changing lender policy
I've been in the property investment game for decades and have experienced various peaks and troughs as well as market cycles.
I've also seen changing lending policy in reaction to economic events such as the GFC or high inflation in the 1980s.
What I haven't seen often before has been the rapidly changing lending landscape that we're now experiencing.
Concerns about the number of investors in the market, as well as the ratio of interest-only loans, has prompted APRA to clampdown on lenders.
The big banks have to reduce their investor as well as their interest-only loan ratios, which means that products that were there a few months ago are no longer available.
What it boils down to is that it has become more difficult for some people to get a loan approved with lenders requiring larger deposits, lower loan-to-value ratios, or borrowers paying principal and interest rather than interest-only.
The conclusion is there is not much you can do about changing lender policies, but you can be aware of what's available and what's not to increase your chances of success.
- Credit file concerns
Another way that lenders assess your loan application is by delving into your credit file or your credit score.
Now your credit file is like a "little black book" of your financial history but it mainly focuses on any bad stuff.
When I say "bad stuff", I mean late payments of your power or utility bills as well as multiple applications for personal loans or credit cards, which might show an inability to balance your books.
One way to prevent any credit file concerns, of course, is to always pay your bills on time and limit any bad debt such as personal loans or credit cards.
Another good idea is to understand what's in your credit file, because mistakes can sometimes occur due to the sheer number of entities that you probably have financial connections with.
Know your credit file details and fix any mistakes sooner rather than later to improve your chances of loan success.
The lesson from all of this is that there are a number of variables that lenders use to assess every loan application.
You can make yourself more attractive by having a solid employment and savings history as well as paying your bills on time and reducing any bad debt.
Understanding current lender policies, selecting an investment grade property, and having a clean credit file will also mean that your application goes to the top, rather than the bottom, of the pile.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.