10 things that can derail your mortgage application
Securing finance to purchase a property can be difficult, which is why it is essential to make sure your application is error free. Below is a list of guidelines to follow, or you may want to get the help of a local mortgage broker.
1. Be honest about your financial position
One common reason that mortgage applications get declined are missed bill payments.A potential borrower’s credit history is closely scrutinised by their chosen lender. Any overlooked bills can be particularly costly, says Belinda Williamson, spokesperson for Mortgage Choice.
“Your credit history should be squeaky clean if you want a home loan,” she says. “Generally, a default is listed on your credit file after three months of missed payments on a debt commitment. What you consider one simple default, say, on a phone bill or utility bill, could hinder you from receiving a home loan approval for a good five years or more.”
Williamson says that the easiest way to avoid this is to pay your bills “on time, every time.” She also recommends checking your credit file prior to application: this can be ordered from websites such as www.mycreditfile.com.au.
What if you’ve got problems in your past? Justin Doobov, managing director of independent mortgage broker Intelligent Finance, says that all is not lost.
“If you have a default, let your broker know upfront and they can select a lender that is OK with it,” he says. “We settled a loan for a client who had a $40,000 default. We were able to explain the circumstances as to why it occurred and the lender approved the loan without question.”
2. Make sure you declare all your expenses
Forgetting to mention that emergency credit card is also a common problem, and one that can derail an application, says Doobov.
“I have seen some clients not disclose their five credit cards – or even expenses relating to their kids – when they come to us. 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 up front and get an approval that will be honoured.”
3. Employment woes
Lenders like borrowers who have a relatively stable recent employment record – at least six to twelve months or more in your job, receiving regular income.
“If you are looking to change company at the same time you are looking to buy a property, seriously reconsider one or the other,” says Sheppard. “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.”
4. 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 can derail purchases altogether.
“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.”
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 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.
5. Knowing your limits
It’s all too easy to get caught up in enthusiastically hunting for property without knowing exactly how much you can borrow. Sheppard’s heard many stories of buyers finding their ideal home or investment, before heading to a lender to find they can’t borrow enough to pay for it.
“This is even more of a serious situation when a buyer has made a successful offer at auction and suddenly can’t come up with the rest of the dollars, because they can lose part or all of their deposit,” she adds.
You can avoid disappointment and/or losing your deposit by seeking out a loan pre-approval before looking for property. These are usually valid for three to six months.
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,” she comments. “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.
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.
Sheppard warns that you shouldn’t just take the largest loan you can get, either.
“Don’t be tempted to go with the one that will lend you the most, as you may quickly find out that you are stretched beyond your limits and need to sell up,” she says. “Make sure you are aware of what commitment you can comfortably manage, with interest rates at this level and a couple of percentage points higher, and know your budget back to front.”
8. Not getting the right loan structure
“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 lender’s policy,” says Doobov. “That’s like going to the $2 shop to buy a suit and then trying to tailor it to look and fit you better.”
Doobov comments that it’s much wiser to map out the desired loan structure and features first, and then start shopping around for lenders that will approve the loan structure at a low rate.
“This saves clients thousands of dollars, as they then have the right structured loan and it will cater for their needs now and well into the future,” he adds.
Getting the right loan in the first place is particularly important for investors, who often need to make use of loan features like offset accounts and redraw facilities – and can save you from costly interest payments and refinances further down the track.
9. Dinky deposits
Several years ago, it was more than 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 (see below), 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.
10. Purchase cost pain
As mentioned above, there are a wide range of purchase costs in addition to your deposit, including (but not restricted to): lenders mortgage insurance, 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, says Doobov.
“You don’t want to find out on the day of settlement that you are $30,000 short,” he says. “Do a cash flow summary well before you exchange on a property to ensure that you have enough cash to fund the purchase and associated costs.”
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 that 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. Read all you can about property investment in Your Investment Property magazine and its website, wwww.yipmag.com.au, too: you’ll find out lots about unexpected costs even in the articles that don’t directly address costs.
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