Weekly wrap - Friday 5th March
The 5 most common (and avoidable) reasons you may be declined by your bank for finance
It is a bit of a tough market out there. We are seeing more than usual clients that are coming through to us after being declined by lenders for unknown reasons or very important reasons. Let’s break down a couple of those topics and address some things to look out for if you're going through the loan application process.
1. Do you have a bad credit rating?
Comprehensive credit reporting plays a massive role in your loan application. Your credit score has a huge effect on the chance of being approved. And you need to understand that credit files will now show the conduct you have on facilities over the past two years. That includes facilities that may have closed. If you've had credit cards, Zip Pay, Amex, home loans, personal loans, car loans - those will all show on your credit file, even if they've now been closed, and it will show if you've made your repayment on time for the past two years. All the banks can see that, and it will cause delays or issues if there are historical arrears, so it’s definitely something we've got to have a look at.
So jump online to Equifax, download a copy of your file, and get a feel for what's on there. That always forms part of our discussion before going anywhere near a lender.
2. Not enough deposit
The banks are different in how much deposit they're going to need. Some are working on 5%, some are 10%, some are 20%. A lot of the times we meet with clients that haven't maybe factored in enough; they may have forgotten stamp duty or other costs such as mortgage insurance.
Furthermore, banks have different requirements about where that deposit is sourced from: genuine savings, a gift, or from equity? Has it been in your account for three months?
We need to make sure that the deposit we have is enough for a particular bank and the property we're buying and also that it meets that bank's policies around the source of that money.
And it's interesting how much that changes between the banks. A lender will go to 95% on one particular type of property and another one won't go above 80%, so there definitely are huge differences in the types of deposits required and where they come from.
3. Have you been in your job long enough?
We even work with a lender checking if you've been in your job long enough, which is probably more relevant than ever at the moment, especially because of COVID. Likewise, is your income made up of allowances? Is it made up of overtime? Are there commissions involved? Some banks still want to see two years worth of a bonus income to be able to include it, where others might look at a 6 to 12 month period. Banks need to know how your income is earned.
4. Spending habits out of control
That is a big reason why you might be declined by a bank. Lenders definitely look into our spending habits. And not only the mandatory costs, but also discretionary spending. Again, depending on the bank and the lender, we may need to demonstrate that we can adjust your spending to meet that commitment if current spending doesn't show that you have the borrowing capacity required to meet repayments.
This is probably a really tough point at the moment but it's not uncommon or unreasonable to think that a client will adjust to those expenses when the new debt or a new commitment comes into play.
It's a great exercise to go through and we spend a lot of time with clients upfront doing that. Can we close the ZipPay? Can we get rid of the Afterpay? Are we maybe going to start living like we've got the home loan and demonstrate, not only to the banks, but responsible lending is about demonstrating it to yourself, that you're comfortable with that level of commitment.
And don't forget to account for proposed expenses eg: rates and insurance, and potentially body corporate fees as well. It is a great exercise to understand what your outgoings are going to be moving forward.
As exciting as 1.99% pa is, we won't always be 1.99% pa, and the banks are factoring that in because, if we can afford it at 2% pa, that's great, but what if rates were 4% pa or 5% pa or 6% pa? What does that look like?
5. Buying an apartment or buying a property that doesn't meet the bank's requirements
That is very common at the moment and quite confusing and frustrating at the same time for a lot of clients. The deposit is a big part of it: do we have enough deposit to provide the bank for that type of security?
You also need to understand the importance of postcodes, a classic one for us here on the Gold Coast. Being a high density area, we do have postcode restrictions for different banks.
If we're buying a unit or apartment, lenders will want information about the building: how many floors, how many units? Can the unit be permanently occupied? Is there holiday letting ability? Are there resort style facilities? All these will make a difference to how much deposit we need as well as the bank we're going to.
And then it’s important to ask questions about construction, the type of property you’re looking to purchase and its location. Because that's going to make a difference to the bank that we facilitate your pre-approval through. It sometimes happens that a bank will tell you: "We'll lend you the money, you just can't buy the property you want."
In our process, we talk about those five areas: the credit rating, deposit, have you been in your job or employment long enough, your spending habits, and the type of security you're looking to buy. There's nothing on that list that's unavoidable. We do the research, and clients might think we ask for a lot of documents.
Well, first of all, we want to be incredibly accurate and thorough in our research to come back to you with a recommendation and, secondly, we don't want one of these to be a reason that you would be declined with a particular lender.
In this market, we need to be organised and ready to go, making sure our terms are favorable. All of this research allows us to put in a favorable offer and to be able to negotiate on that price because our terms are really good as well. And then we can get excited about that property because we know we're good to go.
If you didn't pick up from that, we are super organised, very keen and incredibly thorough. By all means, get in touch, let's have a chat.