Want the bank to say YES to your home loan application? Your Money Magazine drops hints on how you can maximise your chances of getting your loan approved.
Know what the banks want: the lending criteria
Every time a bank approves a loan, they incur some risk: the possibility of not recovering their entire loan because the borrower has defaulted. Government regulations also require lenders to satisfy themselves of borrowers’ serviceability.
This is why banks are keen to avoid any risky borrowers, and do so by comprehensively checking the financial background of every applicant. Before going on a loan-application spree, assess your suitability from their point of view:
- Ability to repay
The essential step to securing a loan is whether you can meet the repayments. Lenders will evaluate your ability to repay by calculating your after tax income (‘surplus income’) and all expenses, based on whether you’re single or a couple and if you support any dependents.
Repayments on the loan are usually calculated at a slightly higher rate, to allow for an increase in interest rates. The additional percentage is a comfort margin, to ensure you don’t default on your repayments after an interest rate rise. It’s important to realise that that lenders weigh up these factors differently.
Additionally, lenders want to make sure their potential borrowers have:
- an unblemished credit record: a small default (for instance to telephone companies) could severely weaken your application
- a good track record of saving: generally at least 5 per cent of the property’s value and at least 3 per cent for first-home buyers
- Satisfactory equity contribution
Without a doubt, lenders will require you to put down a minimum deposit, of at least 10 per cent of the property’s value. In addition to the deposit, you would also be expected to cover the following extra costs, which total in the thousands:
- lender’s start-up fees
- lender’s mortgage insurance premiums
- any mortgage protection insurance you may choose to take out yourself
- government charges, such as stamp duty
- legal expenses, like conveyancing costs
- inspection costs
For your personal benefit, develop a cash flow summary to see if you can cover the deposit and these costs.
- Secure income
For a lender, the tell-tale sign of a steady income is continuity of your employment – that is, remaining in the same job and receiving regular income for at least six to twelve months.
Ideally you should avoid changing jobs while applying for a loan, says Kristy Sheppard, senior corporate affairs manager at Mortgage Choice. “Stay in the same employment at least until you have the mortgage. If you are determined to change jobs, ensure you have enough money saved to cover mortgage repayments and lifestyle costs for a few months or even more, should it not work out.”
If you’ve spent a fair amount of time in your previous employment, it’s no drama if you’ve switched jobs within the same industry. However, it’ll be harder to get a loan if you’re in a probationary period. If you’ve had a career change, lenders are likely to wait a few months into your new job before providing a loan.
If you’re self-employed or work on a contract, lenders want to see how stable and consistent your income is. Expect them to examine the income you’ve declared to the tax office, for the two previous financial years. A very common rule is to average the income you’ve declared to the tax man over the last two financial years.
- Property-specific criteria
Even if the lender is confident you can repay the loan, they need to consider unexpected circumstances that could force you to default, such as a sudden job loss. In this case, the lender would sell your property to recoup their losses as much as possible. In other words, the property acts as security against your potential loan.
For this reason, its re-sale value is a significant factor in the application process – lenders will not provide generous loans for small, downtrodden properties unless it has a phenomenal quality that adds greatly to its worth (such as harbour-side views).
Lenders are more inclined to offer a loan for a low-rise residential property in a highly-populated suburb or city. On the other hand, you could have a harder time securing a loan for a property in a remote area; high-rise inner-city properties (which are subject to volatile market prices); or for special-purpose buildings such as retirement villages and student accommodation. In these “risky” cases, you may need to put down a larger deposit.
Furthermore, the lender is less likely to offer you a loan if they have already provided loans to plenty of properties in the same area. This is to protect the lender against multiple defaults, in the event of an unfortunate incident in that location.
For these reasons, lenders will typically have a loan-to-valuation ratio (LVR) of 80 per cent of your property’s value. This means borrowing 80 per cent of the property’s value.
If your property falls under the “risky” category, you can expect a lower LVR of 60 to 70 per cent.
If you think you’ve chosen a property the bank would find safe, then you can increase your LVR by taking out Lenders’ Mortgage Insurance (LMI).
Consult a broker
Still unsure of how successful you’d be in obtaining a loan? Don’t start applying for loans until you have a clear idea of your serviceability, because each application is likely to be stated on your credit record. If your credit record lists numerous applications, it will give a negative impression to future lenders by implying that you’ve been constantly knocked back for approvals.
To help give a more accurate understanding of your chances for approval, use a mortgage broker. Make sure your broker understands not only the interest rates available, but also the individual lenders guidelines, so you have the highest possible chance of approval. Brokers should understand how each lender assesses different income sources differently, and that some lenders are more suitable for investors whilst others are better for owner-occupiers.
Ask your mortgage broker if they can get any lenders to give you in-principle answers before they consult your credit record. The idea is that if they are going to knock you back, to get them to say ‘no’ privately before they consult your credit record and records your application for a loan.
Always be frank with your mortgage broker when disclosing your expenses and financial background, so that an honest application can be developed. Any black holes will later be spotted in your bank statement, leading to more applications stamped on your credit statement.
Develop the right loan structure before shopping around
Before diving into the mortgage market, develop a loan structure that caters to your current and future financial circumstances.
“A mistake many people make is they look for the lender with the cheapest interest rate and then try and change their position to fit that lenders policy,” says Justin Doobov, managing director of independent mortgage broker Intelligent Finance. “That’s like going to the $2 shop to buy a suit and then trying to tailor it to look and fit you better.”
With these details mapped out, you can start lender-shopping to see who will approve your loan structure at the lowest interest rate. By getting the right loan approved, you can save thousands in repayments and are less likely to refinance in the future.
The loan size offered by lenders varies widely, so shop around thoroughly. Kristy Sheppard, from Mortgage Choice, recommends that you shouldn’t shop around to find who can lend you the most money – those that appear to be most generous could also be stretching you beyond your limits.
Get your papers in order
Lenders are notorious for requesting additional clarification or documentation, which creates massive delays in the loan application process. To avoid having your application lie in limbo, collate the following documents before you approach any lender:
- Final purchase contract for the house (if applicable)
- Pay slips for each applicant and sometimes Group Certificates or Tax Assessment Notices
- Personal and business tax returns for the previous two years – some lenders may require three years tax returns – if you are self employed
- Account numbers for all bank accounts, along with account statements
- Information about debts, including loan and credit card account numbers and account statements
- Evidence that your existing mortgage account has been paid regularly for the last 6 months in line with your loan agreement if you are refinancing
- Evidence of rental income for existing and/or proposed investment properties.
- Letter of employment from your current employer, including their contact details
- Record of employment from the previous three years; if you’re self-employed, call in your accountant to help provide your financial details.
- List of all your assets and liabilities
- Proof of identity (e.g. driver’s licence, passport)
- Details of your current address (and previous addresses if you’ve moved residence in the past three years)
The paperwork you hand in needs to be complete and authentic, says Doobov. “If you only send in part of the information the bank asks for, you end up getting a conditional approval that has lots of conditions,” says Doobov. “The problem comes when you find a property and send in the remaining information. You could be at risk of the lender not liking something that they see and the lender then has an opportunity to decline your loan.”
To ensure you get it right the first time, it’s best to have a mortgage broker to handle the paperwork. If you want to go it alone, then thoroughly read the lender’s instructions. Remember, if you’re putting in a joint application, you’ll need to provide evidence for each applicant.
What if I have an ugly credit history?
Although missing bill payments and credit defaults tops the list of reasons for rejected loan applications, not all hope should be lost if you have a flawed credit report. A default is normally listed on your credit statement if you failed to pay a bill for three months.
The easiest way to avoid this problem is to simply pay your bills on time, every time. You should also check your credit file online before applying for loans, at www.mycreditfile.com.au. A credit file normally lists:
- Any loans you have applied for in the past 10 to 15 years
- References to bad credit you may have had in the past seven years
- Bankruptcies or judgments
- Current and historic directorships in companies
- Past residential addresses
- Historical employment data
If you have outstanding debt, pay off your credit card and close it down. If you can’t do that, reduce its limit by as much as possible. A limit of $1,000 won’t cost you much on serviceability calculators. Be sure to demonstrate to the lender that you’re repairing your credit history.
Convince the lender that your default was a one-off event, and that you are unlikely to default on your loan in the future. This could mean exploring more costly options such as non-conforming loans, but could save your application from being declined.
If you think your credit history is unfairly weakened by default listings, you can contact Credit Repair Australia (CRA), whom attempt to remove disputable and negative listings of default from your credit report, to improve your chances of receiving finance.
If it looks as though you could have credit problems, contact any credit providers (including providers of services like phones and energy) and try to come to a payment arrangement with them, as this will keep your credit record clean.
The most important thing to do is come clean about your credit history, to your broker and lender – non-disclosure is a common reason for knock-backs by lenders.
Bouncing back from rejection
No aspiring borrower likes to hear the word ‘no’, but chances are that you could if you’re a first-home buyer, have an imperfect credit history, experienced inconsistent employment patterns or simply miscalculated your chances of approval.
In any case of rejection, find out who declined your application and why. It could be a learning experience that improves your chances of success for next time.
Given different lenders have various guidelines; remember that an application knocked back by one lender could be accepted by another. Perhaps with the help of a different broker, try to see if you can meet the criteria of a different lender.
If your second application differs from your first, you could be declined again because of anomalies. This could paint you in a bad light, as it implies you signed a declaration on both applications to verify the information is correct. As a borrower, you must thoroughly check the information that is presented to the lender on your behalf, for accuracy.
If you think you have a borderline chance of approval, you could also try the following:
- If you’re after an investment property, ensure it’s one that will provide a high rental yield
- As an owner-occupier, boarders could help you meet your repayments. Lenders are unlikely to be impressed by this, unless the property has a separate flat. You can then expand into the boarder’s space, once you’re more financially secure.
If you’re comfortable doing so, you could ask your family to act as a guarantor or service a loan. Some lenders, such as St. George and the Commonwealth Bank, have innovative family equity products that can help out in this situation.
Alternatively, you could hold back from applying for the time being. Get your life back together or just wait till your business is making more money and continue renting.