You must consider all aspects of your finances before applying for a home loan. Otherwise, you risk a nasty black spot on your record. Submitting a loan application without the appropriate preparation can set you back a long way in your property goals.
Rejected applications can put an unsightly blemish on your credit record and narrow your options even further when you try again. By pausing for a moment and making sure you are presenting in the best possible way to a potential lender, you will ensure you maximise your borrowing power, and also secure flexible loan features and attractive interest rates. Ask yourself whether you have taken measures to avoid the following loan-killing traps.
Tick all the boxes
When filling in an application for finance, not many people realise that by leaving sections of the form empty, they are negatively affecting their credit score. Every section of a loan application is now subject to credit scoring and if you leave a section blank, you are allocated the worst score for that section. This includes filling in your name exactly as it is shown on your driver’s license or passport; and supplying all supporting documents.
Avoid making multiple applications
Every time you apply for a loan, your lender checks your credit rating. Each time it is checked, it shows up on your record. The problem here is that a lender accessing your credit rating cannot see why other credit checks were made, or their outcomes. So, for all they know, you have been rejected by other lenders five times in the last six months, despite the fact you were simply shopping around for the best rates. If you go to a mortgage broker, rather than directly to a lender, they can match you to the right loan product after accessing your credit file, without it showing up on your credit rating.
Check your file, before you wreck your file
You will benefit from knowing what’s on your credit file in advance, so that you can explain any anomalies that may exist when you actually go to apply. Some mortgage brokers will access this for you for free, or at a reduced cost, but if you want to access it yourself, you can do so through:
- mycreditfile.com.au (Equifax) – 1300 762 207
- Dun and Bradstreet – 1300 734 806
- Tasmanian Collection Agency (for Tasmanian residents) – 03 6213 5555
If you are able to wait more than 10 days, this service is generally free. If you need to see your credit file faster, there will be a fee (around $50).Another reason to check your credit report is in case you find loans or credit that you know nothing about; indicating you may be a victim of identity fraud.
Reduce your credit card limits
We love the plastic fantastic in Australia, but you may not realise your little card is having a monstrous effect on your loan application. Your borrowing power is generally restricted by approximately four times the total limits of your credit cards; regardless of whether or not you have debt owing on them. So, if your credit cards have a combined limit of $40,000, your borrowing power is reduced by around $160,000; even if you’re debt free!
If you have multiple debts such as credit cards and personal loans, you might want to consider consolidating them all into a home loan if possible, as this is likely to give you a lower interest rate for repayments. Speak the whole truth, and nothing but It is essential that you list all assets and debts, so make sure you are aware of your complete financial situation. For debts, the lender is certain to find out regardless; and perceived dishonesty will not bode well for your application, or from a legal perspective.
For assets, leaving them out will restrict your borrowing power where you might otherwise have been able to secure extra finance. Assets and debts that are commonly overlooked by loan applicants include: superannuation, home and contents, child maintenance, family allowance benefits and Higher Education Contribution Scheme (HECS) debts, which are now known as FEE-HELP payments.
Sell yourself short, or at least accurately
It’s not a good idea to give a lender the impression you will be able to service a larger loan than is realistic. If you need a larger loan than you can afford, consider saving for another year or two, or finding a way to add an extra income stream. If you are approved for a loan and later default on repayments, you will be extremely hard pressed to find another lender to take you on; at least not with good rates and flexible features.
When applying, do not include superannuation in your base salary; do not include annual bonuses, commissions, or overtime; and make sure your current property has been recently and accurately valued.
Apply when you have two incomes
If you are applying for a home loan in one name and you have a spouse that is not currently working, you will still be treated as a couple for the purpose of loan servicing calculations, even if your spouse is not on the loan documents or title. In calculating your borrowing power, a lender takes all commitments into consideration, including living expenses of dependants.
However, if the spouse is working and earns sufficient income to cover his or her own living expenses, as evidenced by a payslip; then you can be treated as a single and can qualify for a higher loan amount, because you have less commitments.
Be mindful of maternity leave
One partner being on maternity leave can have a significant impact on your borrowing power. Even though you are still employed, many lenders won’t consider your normal income levels because at the time you apply for the loan, you may not be receiving your regular pay amount.
Different lenders treat income received during maternity leave in different ways. Some factor in a proportion of the income to servicing calculations, while others exclude all income if it is not consistent and ongoing. Starting a family can significantly affect your ability to get a home loan.
Some tax benefits are not permanent
Family tax benefits A and B are usually considered a part of your income when applying for a loan, but bear in mind that as your children get older, the end of these benefits draws near. Many lenders will choose to ignore part of this income stream if the children have reached age 11; because the benefit income will no longer be seen as ongoing (the benefit expires when children turn 18). Lender policies vary on this matter, but if your financial situation is tight and you’re applying for your maximum amount, this can have a large impact.
Loans are a value proposition
Sometimes people forget that banks only lend on loan to value ratios. If a lender’s valuers appraise the property at less than the purchase price, this can throw out the agreed LVR. For example, the 90% they are willing to lend moves from $360,000 to $324,000, after you have agreed to buy a house for $400,000 and the lender appraises the value at $360,000. You have your $40,000 deposit, but are still $36,000 short. If this happens, you have several options; you can try to renegotiate the price down with the seller, explaining that your finance won’t go ahead otherwise; you could ask the lender to appoint a new valuer, at your own cost; or you can try and find a new lender and hope the next valuer sees the property as favourably as you do.
To discuss this article or anything to do with your finances, please call our office today and we will be happy to assist you.