Every application you make goes on your credit file. As such, you want to ensure you have the best possible home loan application. Getting rejected can make it harder to secure a loan in the future.
Rejected applications are recorded on your credit file and narrow your options for home loans. By following these steps, you can ensure you have all your bases covered and are presenting an accurate, more favourable home loan application which will help you get more flexible home loan features and better interest rates.
Complete everything on all the paperwork you need to include in your home loan application. If you leave sections blank it can have a negative impact on your credit score as the lender needs to allocate a score for that section and if there is no information to tell them otherwise it may result in a very low score.
This includes basics such as filling in your name exactly as it appears on your license or passport, supplying all supporting documents and completing every section accurately on all paperwork.
Every time you apply for a loan, your lender checks your credit rating which records an enquiry on your report. If a lender views multiple enquiries within a short period of time, it can look like you have been unable to secure finance. 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.
An important step in any application is checking your credit file before you apply. Knowing what is on your credit file before making any applications, fixing any anomalies that may exist or being prepared to address them before you apply will help with your application. 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:
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.
Australians love their credit cards, with over $32 Billion owing collectively, or around $4,200 per card holder. This can have a negative impact on your home loan application. Your borrowing power is generally restricted by approximately four times the total limits of your credit cards, 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!
This is where debt consolidation can come in handy. 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.
Do not try to hide any of your debt or make your income and assets seem higher than they actually are. List all your debts and assets accurately, so both you and the lender have a clear picture of your financial situation. 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 how much you owe and where you owe it. 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 which 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. Take the time to work out all your assets and debts properly.
While you might want a mcmansion, can you really afford to service a home loan that large? Giving a lender the impression you will be able to service a larger loan than is realistic puts you in a precarious position. 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, work out your budget and affordability based on your lowest possible income. This means, exclude annual bonuses, commissions and overtime to get a sense of what your base income is. While you can use your bonuses, commissions and overtime to secure a larger loan, only do so if you are confident you will be able to service the loan without them, otherwise you might find you can’t afford the loan later if the company stops bonuses, reduces commissions or cuts overtime.
Work out if you want the loan in one name or two. Even as a couple the circumstances can vary. For example, 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 dependents.
However, if the spouse is working and earns sufficient income to cover his or her own living expenses, as evidenced by a payslip; then your serviceability can be treated as a single and can qualify for a higher loan amount, because you have less commitments.
If you want the loan in both names, include both incomes to increase your borrowing power further. However, take into consideration any change in circumstance that could be likely, such as having a baby and dropping back to one wage. Ask yourself if you can still service the loan on one income before applying for a larger loan.
The full amount of maternity leave is usually not taken into account by lenders which will impact your borrowing power. This is because even though you are still employed, at the time you apply for the loan, you may not be receiving your regular pay amount.
Starting a family can significantly affect your ability to service a home loan. Different lenders consider maternity leave differently, so speak to a broker to discuss your options.
While most lenders allow you to include family tax benefits A and B as part of your income when applying for a loan, be aware you will not always be eligible for those payments and you will still need to be able to service the loan. Those benefits are means tested and have a time limit. As your children grow up, the payment changes and as your income goes up, the amount you receive is reduced. Many lenders will ignore family tax benefit and not include it as income 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.
Lenders have the property appraised before you get your home loan finalised. Banks only lend on loan to value ratios so if their valuer appraises the property at less than the purchase price, the LVR will not match.
For example, the 90% they are willing to lend moves from $450,000 to $405,000, after you have agreed to buy a house for $500,000 and the lender appraises the value at $450,000.
You have your $50,000 deposit, but are still $45,000 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 make the home loan process easier and ensure you have a great home loan application, speak to a broker today about your home loan options.
Disclaimer:
This article is written to provide a summary and general overview of the subject matter covered for your information only. Every effort has been made to ensure the information in the article is current, accurate and reliable. This article has been prepared without taking into account your objectives, personal circumstances, financial situation or needs. You should consider whether it is appropriate for your circumstances. You should seek your own independent legal, financial and taxation advice before acting or relying on any of the content contained in the articles and review any relevant Product Disclosure Statement (PDS), Terms and Conditions (T&C) or Financial Services Guide (FSG).
Please consult your financial advisor, solicitor or accountant before acting on information contained in this publication.
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