Are you having trouble getting your mortgage application approved? Lisa Sanders reveals how you can improve the chances of securing a loan – and explains what to do if your application is declined.
At some point in almost everyone’s lives they will have a credit application declined. I remember working as a credit manager and having my application for an American Express credit card declined – I was honestly shocked and I phoned Amex to ask what happened. I discovered that in order to confirm my employment, they required my company to be listed in the White Pages, which it wasn’t. The payslips, group certificate and tax assessment notices I could provide were considered null and void without a company listing in the White Pages. Go figure.
As someone who has worked in this industry for almost 18 years, I know that applying for credit can sometimes be a confusing and frustrating experience – but there are ways you can bolster your application and improve your chances of getting your credit application approved.
It’s important to take your time when applying for a loan – I often see borrowers who are in a rush, and they encourage their broker to submit the application to more than one lender at a time. These multiple loan applications could all run the risk of being declined because the information in the application was presented incorrectly. The client is then left with no options, and it’s a total disaster.
There are several things you should keep in mind when putting together your loan application:
- Make sure that the loan is only presented to one lender at a time
- Don’t be pressured by sales people who are looking to make quick commission
- Make sure you ask if the loan is going to require mortgage insurance and how much it will cost
- If further information is requested, provide it in a timely manner
- Always ask questions if you don’t understand
My experience has been that non-bank lender requirements of a borrower are not as strict as banks and building societies – loan applications with the banks can be three times bigger, and you can find yourself drowning in paperwork. Because non-banks often require less paperwork, as a result, the loan process can be much faster.
Make sure you talk to your mortgage broker about the pros and cons of each and consider both options before you decide which is better for your personal situation.
If you are in the situation where your loan application is declined by a lender, remember to ask questions. I have lost count of the number of times I have seen a decision to decline a loan overturned, because more information was provided by the client as a result of asking questions.
Often, borrowers can provide more information to a lender to give them more certainty or to clarify questions raised during the loan assessment process. You can become increasingly frustrated when asked to provide more information during the loan process, but it is a very necessary and important part of the credit process.
All borrowers present differently and because every person’s situation is different, lenders will ask you to provide more information so they have more certainty and confidence to approve the application.
All lenders have different guidelines and it is possible that if the loan was not accepted by one lender, you might still have your mortgage application approved by another. Don’t chase cheap interest rate home loans when you need to be looking at policy and ensuring that you qualify under the guidelines of the lender – instead, make sure the broker you are working with has solid lending experience and understands not only the interest rates available, but also the individual lenders guidelines, so you have the highest possible chance of approval.
When a borrower has been declined for a loan, they will often go to a different broker or bank and submit a second application. The second loan, prepared by another person, differs from the first, and the borrower can be declined by the mortgage insurer due to anomalies (differences between two loan applications). This is a strike on your character, as you have signed a declaration on both loan applications to say that the information provided is true and correct.
This is why it is so important to triple-check all of the information that is presented to the lender on your behalf. People who work as credit assessors are human too and they can make mistakes, so it is crucial that you question anything that does not appear to be correct.
Keep in mind that each time you apply for a loan, a record will appear on your Credit File. If you have too many credit enquiries in a short period of time it can cause you to be declined by a lender based on your Credit File alone, as it can be a sign that you are desperate for funds or experiencing financial hardship.
Remember that to the person who is processing your application, you are not much more than forms in a folder or on a computer screen. They do not know you, what type of a person you are or your circumstances; all they have is the information and paperwork you have provided.
Many lenders are now using computers for credit scoring, which means that your details are entered into their system and it grades the details you provided and gives the lender a score. The application can be declined if the information provided means that you score poorly.
- Character (Integrity, the general impression you make on a lender)
- Capacity (cashflow to service the loan)
- Capital (net worth)
- Collateral (assets to secure the debt)
- Conditions (of the borrower and the overall economy)
The first step a lender will take when processing your application is to obtain a copy of your Credit File and compare the information with what you have provided on your loan application.
I strongly suggest that anyone applying for a loan checks their Credit File (www.mycreditfile.com.au) at least 30 days prior to making an application. It will contain information such as personal details, name, address, date of birth, drivers licence number and current or previous employer. It also includes records of current accounts and credit applications, overdue accounts (defaults), bankruptcy act information, court judgments, and records of Directorships and Proprietorships.
Lenders will also require loan statements and rates notices when you are refinancing a loan, and these must be clear of dishonours and arrears. Some lenders will want to see current statements for all loans when applying with them.
Lenders will want you to provide evidence of your income to give them certainty that you have the ability to repay the loan you are applying for.
If you are employed in a PAYG capacity, lenders will likely want to see your two most recent payslips, a letter from your employer, and the last group certificate issued. Sometimes they will request a copy of your Tax Assessment notice issued by the tax office to have more certainty about your employment.
If you are self-employed, they will want to see your last two years’ tax returns for both you personally and any trading business. They will also want you to provide at least one tax assessment notice issued by the Australian Tax Office. Please note that lenders use the Net before Tax figure, which is less expenses and deductions.
Credit cards and store loans are a potential killer for servicing loan applications. Even if you have a zero balance on your credit card, the lender is going to use the credit card limit in serviceability calculations – so if you have cards you are not using, cancel them or reduce their limit prior to applying for a loan, as it could make or break your loan application.
Debt consolidation can also assist some people to present better to a lender. If you have a number of small personal loans, and credit and store credit, look at combining them into one loan with one repayment to improve your position as a potential borrower to a lender.
If you are a first homebuyer or you are applying for credit for the first time with no other assets, you’ll need to make sure that you apply for a loan that is suited to your needs. Many lenders have loans specifically for first homebuyers, as the guidelines are different for borrowers with other property assets.
Remember not to leave blanks and make sure you always accurately complete the “assets and liabilities” section of your loan application. Borrowers can be blasé when noting down their superannuation, furniture, cars or other assets, but a lender will question a person who has had solid income for many years but no assets to show for it. The lender perceives this as someone who spends all they earn and has no ability to save, and therefore no room for additional loan repayments.
When you are applying for a home loan the lender will require security for it and will register a first mortgage against the property you are buying or refinancing. In most cases, the lender will also require a valuation to be conducted by a registered valuer to confirm that the current value of the property is in line with the purchase price or owner estimate of the security property.
You can avoid disappointment if you do some research yourself prior to applying for the loan. You will need to look for evidence of similar properties that have sold in the past three months, giving you and the valuer an indication of market value. It is also very important to make sure that the property is clean, tidy and presentable to a valuer.
If the property is unique in any way, you may strike problems with some lenders. Some examples would be retirement accommodation, serviced apartments, units under 50 square metres, hotel style accommodation and student accommodation.
It is important to provide any information about the property upfront and not wait until the valuation is complete, as this could determine which lender you apply with, as they all have different security requirements.
This relates to the national and local economy, the industry, and the lender itself. This is often difficult to quantify, but your lender will be sensitive to general economic measures, interest rates, the local economy or area where the security property is, trends within your employment industry, and the financial institutions current level of losses and problem credits.
The credit crisis has put an amazing pressure on lenders not only in Australia but globally in the past 18 months. We have seen dramatic changes to the lending guidelines and how borrowers are looked at as a whole. Loan applications that were taking five to seven days to approve are now taking seven to 14 days. Lenders are asking for more information than ever before and are being far more conservative with their decisions.
If you want to take the stress and frustration out of applying for credit, consider working with a broker. Make sure that they are a member of the MFAA or the FBAA and that they have a wide range of lenders on their panel. You should also qualify them as far as their experience within the lending industry goes, to ensure that they understand lenders guidelines and requirements, and can therefore present you to a potential lender in the best possible light.
In real estate, now is always the best time to buy! Do it with knowledge and make sure you have asked the right questions and have all the correct answers.