For anyone who has tried to apply for property finance in the past year or so, it will come as no surprise when I tell you that more people are being knocked back on their applications since the GFC (Global Financial Crisis) put a large chink in lender’s confidence.
Tougher lending criteria means the chance of borrower rejection is higher now than it has been for a long time. But the good news is, if you know the reasons why the banks might blindside you with a “No” response to your application, you can take pro-active steps to make this less likely to occur.
So exactly why are so many borrowers currently being rejected by the banks?
No deposit equals “no deal”
One of the main beefs that banks have with borrowers these days is to do with how much deposit they have or have not saved. It’s virtually impossible to get a loan without at least 5% demonstrated savings and no less than a 10% deposit, whereas only a few years back you could quite easily borrow 100% with some loan products.
It’s not enough to ask your rich Aunty Jane for a cash “gift” that equals your 10% deposit either. While a deposit obtained this way was acceptable in the past, in today’s financial environment banks want you to be able to prove either a savings history (of at least 6 months and 5%), or a decent amount of borrowable equity as assurance that you are more likely to be able to meet your repayments each month.
Additionally, some banks will ask that you come up with more capital than what you initially offered when you apply. This can occur because there might be a small issue elsewhere on your application (say with serviceability for instance), that could be overcome with a larger deposit contribution from you.
To make yourself a more attractive prospect, ask lenders how much deposit they want to see you save before you apply for a loan. This gives you the chance to be prepared and get the required funds together to get the nod of approval, rather than a heartbreaking rejection.
Service(ability) wins a smile
A big red flag for the banks is an applicant who may have potential serviceability issues, such as a less than stable income (perhaps a self employed or casual applicant), or employment history. You can also expect to come under scrutiny if you are still in the probationary period of a new job, or if you have moved house frequently with no real reason, as this makes lenders think you might be running from money problems with other creditors.
You also have to demonstrate to the banks that your monthly expenses don’t outweigh your monthly income. In other words – your bottom line needs to be in the black, rather than the red each month.
To get around these issues, it’s best to be upfront with lenders and air all of your “dirty laundry” as soon as you apply for a loan. If you have changed employers or addresses frequently with good reason, make sure you explain this in writing to them. Additionally, try to apply for your loan before seeking a new job to avoid being rejected because you’re still on probation with your employer.
When it comes to being able to service the loan and repay the amount you are seeking, make sure you can afford it before applying. Draw up a monthly budget to see what you have left over each month after paying all of your bills and use the on-line mortgage calculators to work out what your repayments will cost. You can also seek advice as to your borrowing capacity from a mortgage broker.
Problem properties are less preferable
Some applicants who have the best borrowing credentials on paper still face rejection from lenders if the property they want to use as security is less than desirable.
For instance a small studio apartment, a house in a rural town or a property that needs work and may not be valued by the banks at the contract price you’ve agreed to can all get borrowers into strife with the banks.
Logically, this is because the lender wants to know that if everything goes pear shaped and you can no longer meet your repayments, they can put your property on the market and recoup their losses. Also, a lot of mortgage insurers flat out refuse to cover what they consider to be high risk properties, so the banks will only look at lending on these purchases with a much lower LVR, of perhaps 60%.
The best way to avoid rejection for this reason is to buy the right property! As an investor, this is a critical component of growing a strong, wealth building portfolio anyway. Properties in inner city areas with good rental prospects are not only more attractive to lenders, they also make far better investments with greater chance of producing above average long term capital growth and stable returns.
Bad credit is bad news
It might seem obvious to point out that if you have glitches on your credit file, rejection from lenders is pretty much guaranteed. Any defaults, such as unpaid utility bills, or tardy payments to creditors, will all see you black balled by the banks.
One thing that many loan applicants don’t consider when it comes to their credit history though is the problems that can arise if they “shop around” for finance. You see, whenever you apply for a loan, whether it’s approved or not, this is recorded on the credit file that the banks will access when you go for a home loan or property investment loan.
Shopping around might seem reasonable to the borrower, but for the banks it raises the question as to why you did so. You might have just been trying to get the best deal, but they could think that you were denied by previous credit providers numerous times and therefore had to keep trying for approval.
To avoid rejection due to a question mark over your credit file, there are several steps you can take. First and foremost is to meet all of you financial obligations on time, every time to avoid any bad reports on your credit history. Secondly, if you have a dispute with a credit provider, try to resolve it as quickly as possible so future lenders can see you have tried to meet your responsibilities.
Use a good finance broker to shop around for you when trying to get the best deal for a personal loan or car loan to avoid having multiple enquiries on your credit file. And finally, stay ahead of the banks by checking your credit file before they do. You can get a copy of what the banks will see by contacting the companies who hold your records, such as Veda Advantage.
Is it worth it?
When you apply for a loan against a property, the lender will send out a valuer to assess how much that property is worth. This is so they know that if the need arises for them to sell the security they can get their money back.
If the valuer tells the bank that he thinks the property you’re buying is worth $490,000 and you’ve signed a contract at a sales price of $500,000, you may find you can’t borrow sufficient funds to complete the purchase.
If you find yourself in this situation, don’t despair. The key is to always make the contract subject to finance if you are unsure about the property’s value, but more importantly do your research beforehand and be prepared to negotiate if you think the price is too high. Additionally, if the bank valuation comes back lower, this might give you the ability to go back to the vendor and re-negotiate the purchase price.
Would I lie to you?
The final and perhaps most damning reason for rejection from the banks is non-disclosure or fraud. It’s human nature to want to reveal only the best about ourselves, particularly on a loan application, but if you fail to provide information that is critical to your application, whether on purpose or as an oversight, expect to be denied. Lenders want to know they can trust you as a client and attempting to start this relationship with lies will not get you over the line.
Worse still, your “oversight” could be viewed as purposeful deception or fraud and this will be noted on your credit file. To avoid such nasty consequences, be honest! If you have to lie to gain finance approval, my advice would be don’t apply in the first instance as it’s simply not worth the trouble you could find yourself in. Make sure you have everything in order to present to the banks and answer all of their queries as truthfully as possible.
The key is to present yourself in the most attractive light as possible to prospective lenders. If you make your application impossible to refuse, then you won’t have to risk rejection!
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