So what should you do to prepare?
There are preliminary steps that prospective borrowers can take to improve their chances of obtaining a loan approval. Since the global financial crisis of 2008 resulting in the tightening of access to global wholesale funding, contributed to banks overhauling of their once relaxed approval processing spree.
Banking underwriting policy and guidelines have gone through a major shift since then and the situation shows no signs of easing in 2011 and beyond since also the introduction of responsible lending banking practices by the NCCP (National Consumer Credit Protection Act) enforced sine 01/07/2010. The banking industry is now heavily regulated and must trade under an Australian Credit Licence as anyone associated with arranging finance must hold a Credit Licence or be an authorised representative of a Licence Holder.
It is estimated that almost one in four mortgage applications is rejected and usually for the same reason; lack of preparation by the potential borrower. Qualifying credit criteria is now cautious of high-risk prospective borrowers and are more likely to rate certain types of properties and borrowers as unsuitable.
Anyone applying for a home loan needs to present themselves as a reliable, low risk to those handing out the money. The best thing you can do is to be organised and over-prepared – you will come across as a worthy candidate if you can demonstrate your ability to repay the loan.
Your credit file is a vital consideration and those with low scores will be rejected. Lenders view too much activity on your credit file as a negative and even an overdue gas bill will be closely scrutinised and assessed for lending integrity. Check your credit file before applying for a mortgage – it can be accessed for free from organisations such as Veda Advantage.
That way you can prepare for an unexpected or incorrectly identified entry. Your late credit card or mobile phone bill payment could be recorded on your credit file for up to seven years. All lenders must by law check prospective borrowers’ credit files during the application process which includes your credit history of late repayments and applications for credit – whether they were approved or rejected.
Recently divorced or separated: You might find it difficult to borrow money coming down from a dual income to a single income for loan servicing capacity. You might be forced to borrow a lower loan amount than previous.
Ability to save:
It’s almost impossible to get a loan without at least 5 per cent demonstrated savings and no less than a 10 per cent deposit, whereas only a few years back you could quite easily borrow 100 per cent with some loan products. Those days are gone!
Lenders want to see that you are responsible with your money, have been saving for at least three to six months, and are not solely reliant on a windfall gain like a bonus or inheritance. Rental payments history can be used as proof of ability to save. Lenders consider potential borrowers with a strong history of paying rent to a reputable agent for 12 months or more.
Not showing a steady employment history will work against you too. Ideally lenders want borrowers who have been employed in one position for two years which demonstrates stability. This is an issue for individuals who have taken time out of the workforce or for those who have started a new job. The fact that many employers have extended probationary work periods from three to six months has exacerbated the issue, resulting in borrowers having to wait longer to obtain a loan. Lenders require for individuals to have worked for their current employer for at least two years or more.
Obviously having too much debt will not make you a good prospect to lenders. If they see a high level of debt already held then the mortgage is just an added financial burden to take on. The only solution is pay down as much debt as you can before applying to ensure a low debt to credit ratio. For example a $10k Credit Card limit can reduce your end home loan amount by around $60,000.
Often borrowers are rejected simply because they apply to borrow too much money on a mortgage. The home they aspire to is beyond their means to realistically afford. This is best avoided by looking for properties which are within an affordable price range for your current circumstances. Even if you have a strong savings history and a solid deposit, applying for a million dollar loan on low income is bound to lead to disappointment.
Steps to secure a home loan
1. Be prepared – familiarise yourself with your credit history and understand what lenders require.
2. Start saving and keep a record of bank statements for at least six months.
3. Pay your bills on time to ensure a good credit rating.
4. Reduce your credit card debt.
5. If you have recently changed jobs less than 6 months, do not apply for a loan until you are no longer on probation.