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How to get the bank to approve your loan

By MoneyQuest
In First Home Buyer, Home Loans

Getting a home loan can be a murky affair – especially if you don’t fit into a lender’s standard borrower profile. This article looks at the options available for your situation – and shows you how to frame your application to ensure success.

Seeking out a loan – regardless of whether it’s for your home or for an investment property – can be a minefield. With hundreds of products on the market from a sizeable cast of major banks, ‘second-tier’ banks and non-bank lenders, it’s a tough call just selecting a shortlist of loans. However, once you incorporate ever-changing lender policies, finding the best deal for you makes trying to find a needle in a haystack an easy job. Discuss with your broker the best options available to suit your circumstances.

Read on for the inside story on:

  • which lenders will take all of your end of year bonus into account
  • who has the cheapest mortgage insurance
  • exactly how you should explain that late bill payment three years ago
  • which lender to get a loan from if you’re self-employed

Self-employed
You might be your own boss – but the bank just sees you as a potential bankrupt. What do you need to do to convince them that you’re a safe bet?

The inside track
The trick with most lenders – if you’re self-employed – is that you’ve typically got to have at least two years’ worth of financials in order to be considered for a (traditional) loan. You’ve also got to have had an Australian Business Number (ABN) for at least two years.

You need to provide financials for every entity. That could be a lot of paperwork, especially if you’ve got multiple companies and trusts set up. Lenders can annualise tax returns, so if you’ve only got financials for six months out of a year, that’s OK.

What you earn out of a business isn’t as simple as it might seem, either. While you might think that the amount you draw out as salary – say, $50,000 – is your income, that’s not what most lenders want to see in terms of your borrowing capacity. They’re looking at your overall profit, plus any salary that you’ve drawn out of the company. So, if you’ve drawn $50,000 out of the business and made $100,000 profit – that’s typically seen as ‘income’ of $150,000.

Most lenders will also take into account depreciation if you’re self-employed, adding it back onto your income figure, as long as it relates to the tools of the business. However, be warned – car depreciation is a common exclusion. Interest on borrowing for other properties can be added back (minus rent), as can one-off expenses such as bad debts. Sounds good in terms of borrowing capacity, doesn’t it? Well, as usual it’s nowhere near as easy as it seems. Lenders typically average the income across the two-year period, as long as the most recent year is higher. Lenders are also concerned about consistency of income: if there’s a variance of more than 20% across the two years’ financials, that rings alarm bells. For some lenders, it’s an automatic no; some will just take the lower figure; others will take the lower figure and add 20%.

Obviously, this can be a major constraint to self-employed borrowers, especially in the first few years of a business or in volatile economic conditions, where income streams can vary. There is an alternative, however. ANZ just asks for one years’ worth of financials from within the last two years.

Before you dance off to ANZ with your tax return in hand, there’s still a catch: the two-year ABN requirement is non-negotiable. So, if you’re looking to turn self-employed in the near future, it may be worth applying for an ABN sooner rather than later, so that you’ve got added flexibility.

Other lenders may also consider one-year financials depending on your history. However, the simplest solution if you’re planning on going into business for yourself is to get your finances sorted before going out on your own.

Recently changed jobs
You’ve finally snagged that dream job paying you megabucks – time to put that newfound wealth to good use by taking on another investment, right? That’s not necessarily how the bank manager will see it.

The inside track
New jobs are exciting – but lenders are more concerned about whether you’re going to stick it out beyond the honeymoon period.

Probation, probation, probation is the keyword here: many lenders won’t lend until you’re outside of your probationary period in a new role. This can be three or six months – and in some cases, as much as 12 months. If you’re in a job which involves moving employers regularly, such as teaching, this can cause problems.

There are a few exceptions: several banks, particularly the Big Four banks, will waive the probationary requirement if you’re moving to a new role within the same industry – and they usually prefer to see two years’ experience in the same role and/or industry. NAB’s Homeside arm has recently brought in a ‘one day employed’ policy – however, it depends on the borrower’s profile.

If you are moving industry, it can be worth playing the ‘loyalty card’ with your current bank, but they’ll most likely only go for it for loans up to 80% LVR. Otherwise, Commonwealth Bank will usually consider applicants who have been in a new role for three months, even if they are still on probation.

Awkward income situations
Life’s easy if you draw a stable monthly or weekly paycheque: however, that’s not the case for everyone. Bonuses, commissions and overtime are all a fact of life in the modern business environment; part-time workers (especially those with multiple roles) and casual work all add extra complications when it comes to assessing borrowing capacity. How can you make sure lenders take into account every cent?

The inside track
The key to any tricky income situation, regardless of which umbrella it comes under, is to prove consistency of income over time – and declare every scrap of income that comes in. Provide as many payslips, tax returns and/or bank statements as possible to show that income is regular and consistent.

Saying that, there are some tricky policies relating to specific situations that can crop up:

Casual workers: If you’re a casual worker, many lenders will only lend if you’ve been in said role for over a year. However, this can be negotiable as long as you can prove consistent income.

Commission-based pay: Most banks will accept 100% of commission payments, as long as it’s consistently paid over a period of several months.

Bonuses:  Lenders’ policies vary on bonuses: some will only count 50% of bonuses, others will count 100%. CBA will usually count 100% of bonus income, as long as it’s regular.

Overtime:  Again, lender policies differ – some will only count 50% of overtime income, others 100%. This is also industry-specific: for example, jobs where income often relies on overtime or work out of regular hours – such as nursing or emergency services – may find that banks automatically take into account 100% of income. However, lenders may require that this is a condition of employment, evidenced by a letter from the employer.

Part-time incomes: Having one job is easy: all lenders will take 100% of the income of the job you declare first. It is subsequent jobs where the treatment varies: some take 100%, some take 80% and some take 50%. While most of the big four lenders will count 100% of part-time income towards your borrowing capacity, it’s always a good idea to list the highest-paying job first.

Rental/dividend income:  All lenders take rental income into account; how much varies from lender to lender. Seventy-five to eighty per cent is standard.

Where shares are concerned, a number of lenders will not take into account capital gain (this is also the case with property). Typically, you need to show two years’ history of dividends in your tax return.

Credit defaults
The bete noire of loan applications, every prospective investor dreads hearing the question “what’s this credit default on your file”? How can you make sure that the door isn’t slammed in your face at the first sign of a missed payment?

The inside track
The first question is what kind of defaults you’re talking about. If you’ve got one default that’s a few years old for less than $1,000, and you’ve got a sizeable deposit, then you may be able to convince a mainstream lender to overlook it.

The key is being upfront and disclosing what, when, where and why the default happened – as well as making sure it’s paid off.

Knowing if you’ve got a default is the first line of defence. Order your credit report  and check for any defaults. Pay any outstanding defaults – they remain on your file for five years. Then, prepare to be contrite. Lenders also frown upon bank defaults; if you’ve got a default with one bank, you’re very unlikely to get a mortgage from that bank.

Awkward residency situations
Recently moved to Australia? Australian national living and working overseas? Building a property portfolio can be trickier than for your average Joe. What are your options?

The inside track
Out of all the various awkward residency situation, Australian expats have it easiest. Most of the major lenders will lend to Aussies overseas, as long as you’re buying property in Australia; you won’t get funding for a property overseas. Most will lend to 80%, but ANZ and St George will lend above 80% to expats, according to our brokers.

Some banks will also provide loans for foreign nationals living overseas who are looking to buy in Australia – notably St George and Citibank. However, any foreign national will need to obtain approval from the Foreign Investment Review Board before purchasing, and are typically restricted to only being able to buy a home or new property.

It’s foreign nationals residing in Australia which is trickier. If you’re a permanent resident, there’s usually no problem: you’ll be considered under a lender’s standard policies in the same way an Australian citizen is. However, if you’re a temporary resident – say, for example, you’re being sponsored to be in the country by an employer – then you may have issues getting a lender to even consider you. Of those that will, few will lend more than 70% of the value of a property. And, on top of this, you’ll also have to qualify for FIRB approval to buy a property as per foreign nationals overseas.

There are some lenders who will consider temporary residents, however: and chief amongst these is St George. The bank has an entire department devoted to non-residents, and will lend up to 80% LVR to temporary residents and up to 90% to Aussie expats.

Even so, there’s good news for residents who’ve moved to Australia for love. If you’re buying a property with an Australian national, there are no restrictions: you can be a co-applicant on the loan without a problem. So, joint ventures and buying with a partner are both distinct possibilities for the temporary resident looking to invest in Australian property.

High LVR situations
You know that you’re going to be taking out a loan for more than 80% of the property price, for whatever reason. How can you get the best deal on loans that involve lenders’ mortgage insurance (LMI)?

The inside track
First of all, while loan sizes are creeping back up again, the days of 100% loans are long gone. Ninety-seven per cent loans are available: however, these are almost universally 95% loans with the cost of the LMI added onto the loan (technically known as capitalisation). So, regardless of what size loan you’re getting, you’ll need a deposit of at least 5% in cash, equity or shares. This will also need to be considered ‘genuine savings’ so will need to have been in your account for at least three months. Some lenders waive the genuine savings requirement while still in the ‘LMI zone’ if you have a larger depost, including Homeside (10% deposit) and CBA (15% deposit),

However, it’s also clear that not all LMI is created equal. Depending on the size of the loan, the LVR, the underlying LMI provider (one of either Genworth or QBE), the cost can vary wildly. ING DIRECT also runs an offer called a ‘reduced equity fee’ or REF, which sees ING DIRECT take the commercial risk for loans under $800,000 up to 95%, depending on a number of conditions – one of which is that the main applicant has been in their current employment for two years.

There are a couple of sneaky tricks relating to high-LVR loans that our expert brokers have let us in on. Usually, when you apply for a high-LVR loan, the mortgage insurer has to approve your application as well – and their criteria is usually stricter than the lenders.

However, some banks have something called ‘delegated authority’, which allows them to sign off loans without referring back to the insurer under a certain LVR (such as 90%) or under a certain amount (eg $1m) as long as the borrower has a clean credit record. That can be advantageous for the borrower, as the lender may be more accepting of elements of applications that an insurer would frown upon.

It’s generally the big four banks that have this facility, but it changes from time to time: our expert brokers tell us that CBA has a delegated authority from its insurer, Genworth, and CBA confirms that Genworth accepts its credit policy for insured loans up to an aggregated debt of $1m. It adds that there are other factors that fall outside of this dollar ceiling, such as no arms-length transactions, default history and security impediments.

The second is that, if you already own investment properties, it may be worth applying for a loan with a lender that uses Genworth, rather than QBE, as Genworth is more forgiving when it comes to existing debt – especially if it’s negatively geared. Commonwealth Bank exclusively uses Genworth, NAB; other smaller lenders often use both Genworth and QBE, and you can nominate which mortgage insurer you’d prefer to use (normally a broker would do this for you).

Bear in mind if you make more than one application that, if you go to two lenders who use the same insurer, you’ll more than likely get the same outcome.

SMSFs
Buying a property through a self-managed super fund is an increasingly popular option: it’s seen as a simple, tax-effective and elegant solution to taking control of your retirement income. However, the process of financing a property purchase is anything but simple and elegant. What should you bear in mind when approaching a lender for a mortgage?

The inside track
The key to obtaining an SMSF mortgage is making sure that your SMSF is correctly structured and able to service the loan.

In terms of structure, you need to ensure that your SMSF is compliant for borrowing and that the SMSF is allowed to invest in property. You’ll also need to set up a trust which will directly own the property on behalf of the SMSF.

Most of the major lenders now provide an SMSF loan, as do more and more mortgage managers: however, there are often LVR restrictions on loans of around 70%. St George will lend up to 80% of a property value if the SMSF trustee is a company; if the trustee is a person, it will only lend 72%.

Lenders also assess the serviceability of the SMSF, not the beneficiary: therefore you need enough contributions – including rent from the property – going into the fund to be able to service the debt. Lenders typically want to see two years’ evidence of contributions. This can present problems for self-employed borrowers: while PAYG borrowers usually keep up the 9% contributions, this isn’t always the case for business owners – and just throwing $50,000 into the fund to help with servicing at the time of application won’t necessarily help.

Another quirk that older lenders should be aware of is that many lenders won’t accept contributions to the super fund as income for servicing loans once the beneficiaries are over 60 – presumably on the assumption that they’ll be starting to draw on these in the relatively near future. Older borrowers, therefore, may need to put in a larger equity stake to ensure than the rent covers the repayments; the benefit to this, however, is that the property may well be cash flow positive and should boost retirement income.

MoneyQuest
If you’re looking for a loan expert, you need to find someone you can rely on. Someone with experience and integrity. Someone who has your best interests at heart.

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