10 things that can derail your mortgage application
Getting finance is tough enough, even without having your application sent back due to errors. Here are ten things to help clear the air.
1 Not being honest about your financial position
Missing bill payments is the number one reason mortgage applications get knocked back. Missed credit payments can be particularly costly. Your credit history should be squeaky clean if you want a home loan. Generally, a default is listed on your credit file after three months of missed payments on a debt commitment. One simple default, say, on a phone bill, could hinder you from receiving a home loan approval for a good five years or more. The easiest way to avoid this is to pay your bills on time, every time. Take the time to check your credit file prior to making your application.
What if you’ve had problems in the past? If you’ve had a default, let your broker know upfront and they can select a lender that is OK with it.
2 Not including all your expenses
Forgetting to mention that emergency credit card is also a common problem, and can derail an application. Make sure you disclose all credit cards and hidden expenses – or even expenses relating to your kids. When a lender gets your bank statements, they will see all the payments to the various credit card companies, childcare expenses and school fee payments. If a lender were to see this, they would likely decline the loan due to non-disclosure. It’s best to be honest upfront and get an approval that will be honoured.
3 Employment woes
Lenders like their borrowers to have a relatively stable recent employment record – at least six to 12 months or more in their job, receiving regular income. If you are looking to change employers at the same time you are looking to buy a property, seriously reconsider. Stay at the same company at least until you have the mortgage. But if you must change jobs, ensure you have enough money saved to cover mortgage repayments and living expenses for a few months or even more, should the job not work out.
4 Paperwork snafus
The paperwork that lenders require can be significant, and it is important to get it right: sending in your 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, it 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. When you find a property and send in the remaining information, the lender may not like something that they see and 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 first time. But if you’re going it alone, be sure to read the lender’s instructions very carefully several times. And, if you’re putting in a joint application, you’ll need to provide evidence for each applicant.
Make sure you send in the actual documentation that the lender asks for, not substitutes. Aussie Home Loans often sees clients send in ATO tax assessment notices in place of group certificates, or bank statements showing a borrower’s pay being deposited in place of physical pay-slips.
5 Not 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. This is even more serious 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.
Avoid disappointment by seeking out a loan pre-approval before looking for property. These are usually valid for three to six months. For pre-approvals dating from last year, you should check it is still valid, as new credit industry regulations came in at the beginning of 2011.
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 other aspects. For example, many lenders put restrictions on the maximum amount they will lend on properties in regional towns, so you may need to come up with a larger deposit. Make sure you know the rules 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 pre-approval before looking for property. However, not all pre-approvals are created equal. You should ensure you get a ‘fully assessed’ pre-approval. Some lenders issue an automated pre-approval without any assessment; 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. Don’t just take the largest loan you can get, either. Don’t be tempted to go with the lender that will lend you the most, as you may quickly find that you are stretched beyond your limits, particularly if interest rates rise, and need to sell up. Once you know what you can honestly afford, extend your search beyond just one or two lenders.
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. That’s like going to the $2 shop to buy a suit and then trying to tailor it to look and fit you better.
It’s much wiser to map out your desired loan structure and features first, then start shopping around for lenders who will approve the loan structure at a low rate. 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
Three years ago, it was 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%. While some investors will be able 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.
The answer? Do your homework. Get a handle on how much you really need before committing to a purchase – and then add a buffer of at least 5%.
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 duties, 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.
You don’t want to find out on the day of settlement that you are $30,000 short. 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.
Experienced friends, family, mortgage brokers and real estate agents can advise you about the costs you’ll need to pay. They can also give you an insight into ongoing costs, such as land rates, strata management costs, maintenance, insurance and property management.