4 things that could trip you up when applying for a home loan
Owning your dream home is exciting, so the last thing you want is for your home loan application to be held up.
While many factors are considered in assessing an application, showing stability and consistency is key for lenders to determine whether you will be able to repay the loan. But sometimes what’s happening in your life can trip you up. Here are some things to be aware of.
- If you’re at the other end of your kid-wrangling years and looking at returning to work after an extended break, it may be best to wait until you’ve been back at work for a few months before applying for a loan. This will give you time to show stability and consistency in your employment record.
- Having a consistent employment record doesn’t mean you need to have the same job for years, but if you’re planning on applying for a home loan, it might be best to hold off changing jobs. If you do have to, it’s worth knowing that with some lenders you’ll need to show at least two pay slips with the same employer. If you can show over 12 months in the same job that’s even better. If you have a probationary period in your new role, it could also be difficult to have a loan approved until you’ve completed it and the role is made permanent.
- For the self-employed, demonstrating a stable income can be particularly difficult, which is why it’s a good idea to have a solid relationship with an accountant. They can help you put together financial statements, which you’ll need to include as part of your loan application. At a bare minimum you’ll need at least one year’s profitable and consistent trading history to support your application. For most people outside of professions such as medicine, law and engineering, a lender will prefer to see multiple years of consistent income and profitable trading.
- If overtime or shift allowances are a significant part of your income, your credit adviser will be able to provide advice on which lenders may take these into account for loan repayment ability, as not all do.
Credit record and credit score
- In short, lenders offering low rate mortgage products don’t favour applicants with more than a couple of credit enquiries each year. This doesn’t mean that your application would automatically be rejected if you had 3 or more enquiries in a year, but it does mean that your application will need to be strong in other areas. Note that when a lender assesses this aspect of your application that they look back over the past 5 to 7 years to spot trends as well as weighing up your credit score. A single year with a lot of credit enquiries is not positive, but is not entirely uncommon. 5 years of consistent applications for credit, along with multiple credit card approvals and/or payday loans = trouble.
- I’ve been playing the credit card points game or switching between low rate offers every 6 months…should I throw in the towel with this application?! No, not necessarily! Get a copy of your credit score. If it is moderate (or better), you’re probably going to be fine if you’re willing to shut down any credit cards (or credit limits) that are unutilised. Obviously there are some overriding factors, if you personally have a very high income ($150,000+ p.a.) and a $15,000 credit card limit that is cleared each cycle, the presence of that card is probably not material unless you have significant other debt. Similarly, if you are making $250,000+ p.a. and have a $25,000 credit card limit, it won’t be a major red flag. If you are making considerably less than those kinds of income levels and have such large credit card limits, the lender will take a very close look at why this is so. They will also look to see if you are clearing the debt each cycle and whether you have any late fees or rejections for being overdrawn. If you do, regardless of income, it is often taken as a sign of risk.
- The kinds of debts you’ve had in the past 7 years matter. Payday loans and large unsecured personal loans (especially debt consolidation loans) are generally seen as signs of risk in a lender’s eyes. Most lenders providing low rate mortgage products are reticent to approve an applicant that has had a payday loan in the past year. Many will automatically decline an applicant with a history of repeated payday loans.
- Regardless of whether you are concerned about your credit history, it is a wise idea to obtain a free copy of your credit file. Check to ensure that all of the details reflected are accurate. If there any defaults listed, make sure to correct the matter if it is inaccurate or pay out the amount outstanding ASAP. Why? The majority of mortgage lenders will not approve a loan for an applicant with current unpaid defaults. The few lenders that will consider such applicants are usually expensive in comparison to the ones that won’t.
- How do I improve my credit score? If you want a high credit score you need a stable history of official place of residence, infrequent numbers of credit applications, stable employment with increasing income reported over time, consistently positive (i.e. not overdrawn) and growing primary bank balance and no penalties or late fees on any of your accounts that are reporting positive credit data (to name some of the most important factors). All of this is then ranked against your age & location. Most of these factors take time – so if your score is low today – it will not be high for at least a year or two (if not more). That said, you can improve from low to moderate in a relatively short period by being mindful of the above factors and making consistent (on time) repayments on your financial obligations.
Savings & net assets
- Savings and net asset considerations don’t just apply to first home owners. All lenders seek to benchmark their applicants against people of a similar age or stage of life. Ensure that you’ve taken time to build your primary bank account balance at the time of the application and that you have avoided arrears on any direct debits and repayments for the year prior to the application.
- For first home buyers, most lenders will be particularly concerned about your savings history and whether your deposit is considered to be genuine savings if the loan to value ratio for the loan you are applying for is above 80%.
- For borrowers over 50, check that you have an exit strategy from your loan at retirement age that doesn’t involve the sale of your PPOR. Typically this will take the form of using proceeds from superannuation, savings or the sale of other investment properties. If you think that this will be challenging for you, address the topic upfront with your credit adviser. All participants in consumer lending want to avoid a retiree facing financial hardship, so it’s best to be realistic from day 1 on how best to structure the mortgage and not just assume that it will be easy make the mortgage repayments for the next 30 years.
- Due to recent reforms aimed at strengthening the stability of the Australian mortgage sector, lenders are looking more closely than ever at a borrower’s capacity to repay a debt. Previously lenders focussed on the use of automated tools such as the Henderson Poverty Index to help understand what a person’s expenses should be. These days, lenders are looking more closely at your direct debits, where you live, your household budget and the balance of your bank accounts and credit cards over time. This means that if you are concerned about your capacity to repay a debt, you need to plan ahead in terms of minimising expenditures and tracking your budget.
- If you are looking for some quick fixes to help with a mortgage application, start by considering which of your credit cards or approved overdrafts you are not utilising. If you could be willing to cancel those approved limits it would likely improve your borrowing capacity as most lenders will count cards and approved limits as if they were fully drawn (even if they’re not). Also consider a fixed rate loan product. Many lenders will provide larger borrowing capacities to borrowers taking a long fixed period (a minimum of 3 years, but preferably 5 for maximum effect). This is due to the effect of the actual rate on hurdle assessments (many lenders will only apply the hurdle rate after the fixed rate has expired).
- Do you rely heavily on investment income or negative gearing? If so, you need to allow for a slower mortgage assessment process. In the last year, in particular, lenders have looked to curb investment lending and are also being more stringent in the maximum percentage of investment income they will allow for debt servicing. This doesn’t mean that you will likely face a decline, but it does mean that lenders offering low price mortgage products will want to see a risk management strategy in place and will also want time to understand the risks associated with your investment profile.
- Do you rely heavily on foreign sourced income? Changes have been made in 2016 to curb lending to consumer borrowers with foreign sourced income for residential purposes, in particular, residential construction. Business lending is still buoyant, but the interest rates and terms are not as favourable as one will find with consumer mortgages. If you are relying upon foreign sourced income it is best to start your preparation of supporting documents well in advance of your application. Getting certified copies of key supporting documents, preferably in english or translated to english, will greatly expedite the assessment process. Furthermore, if you are relying upon transferring funds from overseas to complete a purchase or fund a build, it is best to move that money early in the application so that it can be easily verified by the proposed lender.
How do I get assistance with getting approved?
The team at Naritas are experts in delivering timely guidance & finance approvals. We have over 100 lenders on our panel & a high quality team of dedicated advisers to steer you efficiently through the approval process.