Applying for a home loan should be a straightforward process. You find a property you would like to purchase, you acquire the deposit, you have a good credit score and you have yourself a home loan.
Not anymore, due to new amendments to residential mortgage lending enforced by The Royal Commission. The key takeaways from his change, while keeping banks tightly regulated, has set to put more pressure on potential loan applicants who are deemed to be irresponsible lenders.
This has now meant a crackdown on the number of loans and a much more difficult application process which has opened up a multitude of reasons in which your loan application could be rejected. Here are 10 seemingly innocent activities that will have an impact on your home loan eligibility, overheard in a coffee shop.
1) “Although I had only used $2k of my $6k credit card limit, my lending capacity was reduced based on the full amount which I was approved for.”
How many times have we been told to get a credit card to increase our credit score for a home loan? Personally one of the reasons I gave in to the plastic temptress was to secure my investment for the future, however, did you know that having a credit card and having any sort of debt automatically decreases your lending capacity?
As FreedomLend states your card limit matters:
“For them, your credit card limit is what’s important. They see it as a future liability. In fact, for every $1,000 of your card limit, your ability to borrow money for your new home could be reduced by as much as $5,000.
Lenders evaluate the minimum payment as 3% of your card’s limit, regardless of the amount you still owe your credit card company during your loan application. For instance, if your limit is $6,000, lenders will usually assume that your monthly minimum payment is around $180.”
So what does this mean? Lowering your card limit can help increase your chances of getting that loan amount across the line.
But more importantly the big takeaway here: Don’t have more than one credit card, for lenders this is a HUGE red flag, as they will suspect you are living beyond your means.
2 & 3) “The banks disliked the fact that I was ordering Uber Eats every week”, “My husband’s use of Afterpay was the reason apparently why the bank didn’t want to lend to us.”
Ubereats may not be the biggest deal-breaker for a lot of you, but what about Netflix & Afterpay too?
“Mortgage brokers now say the time taken to approve a home loan has more than doubled and no application is spared a forensic look at discretionary spending.”
Discretionary spending meaning no more entertainment you can subscribe to or pay later systems reports the Financial Review, “In Perth, air stewardess Lauren Lane, 26, had her modest $300,000 application turned down because of Afterpay – the online “layby” shopping system with the catchphrase “shop now, enjoy now, pay later”.”
The fine-tooth comb method through your transactions is to stop irresponsible lending and therefore secure our lending economy. However, this now gives banks greater transparency over how we spend our money. “The scrutiny of each transaction will be like we have never seen before as banks react to the Royal Commission findings and ensure that no person is given a home loan without a full forensic review of spending habits to ensure the repayment of the loan can be made without negatively impacting the lifestyle of the borrower from a lack of residual income.”
4) “We missed a couple of payments on our Energy bill, which means that our credit rating was impacted.
Late bill payments are looked on as bad in the eyes of any lender, however, did you know that even being 14 days past a payment due date will affect your credit score for up to 2 years? Whether it’s a letter that hasn’t been able to be located or payday was past the due date, you will be disapproved for a loan.
Below is a breakdown of how the severity of each late payment according to equifax and their comprehensive credit report.
- Late payment: Payment was more than 14 days late past the due date. Late payments are classed as “repayment information” and they stay on your credit report for up to 2 years.
- Default: Payment was more than 60 days overdue and the due amount was $150 or more. Defaults stay on your credit report for up to 5 years.
- Serious credit infringement: Payment was more than 60 days overdue for $150 or more, and the lender has sent a written notice to your last known address but you have not contacted them or paid the debt. Lender waits 6 months after sending a notice, then lists infringement on a credit report. Infringements stay on your credit report for up to 7 years.
5&6) “I underestimated how much we spend every month. Then the bank asked for our 3-month statement and went through our outgoings line by line”, “A couple of nights out using my card for every single drink order apparently looked poorly when the bank was reviewing my statements.”
Say goodbye to nights out with friends for a while, not only is it your discretionary spending being flagged but also our gym memberships, beauty services, takeaway coffees, toll fares, hobbies & travel and our expenditure day to day or night to night.
Banks now have greater access to consumer’s financial data with open banking and with this open data system, which was phased in July 2019 banks will be able to access and share consumer-approved digital banking data and transaction records, giving greater visibility of our spending habits.
7) “I couldn’t find the time to locate all of the documents they were asking for.”
Before applying for a home loan it is important you have all the documents ready BEFORE you take the first steps. This ensures a smooth application process for you and your mortgage broker and will ensure you get the property that you desire. Here is a list of the documents you will need once you start the process.
- Proof of identification, 100 points
- Proof of employment & income
- Proof of savings
- Proof of current debt (including hecs)
- Proof of assets
- Completed application form
8) “The valuation on the property we wanted came in lower than the contract price – I didn’t even know this was a thing”
Not only is this a thing but it can also mean that not only do you lose the property you wanted but you also lose your deposit because the bank valuation comes in too low.
This seems to happen more than we would like to think with an estimated 35% of all loans declined due to property valuations coming in low, estimated by the association’s CEO, Peter White.
So how to not have this happen? According to Domain “Doing plenty of research on the property you are purchasing as well as the surrounding area will help guide you to negotiate a fair purchase price.”
9) “I am on maternity leave”
Being on maternity leave is going to make your application process for a loan difficult. Due to minimal or no income, you can be seen as a high-risk applicant, which as we know throughout this piece puts up barriers to securing a loan. While some lenders may be more accommodating and let you borrow the most basic amount, a large majority will most likely reject your application. While this isn’t a hard and fast rule it is best to be organised and ensure you are with the right lender.
While the application will be more difficult you will have a deeper assessment into your income, assets & liabilities. You will need to provide a date in which you return to work & evidence of the fact.
10) “My housemates are not on the lease, only I am. Therefore the bank said they will need to take it as though I am responsible for paying 100% of the rent even though I’m not!”
If you house share with others, yet you are the only person on the lease, the lender will see this as though you are responsible for 100% of the weekly rent. For example, let’s say you rent a 3 bedroom apartment which has a total weekly rent of $750, you pay $250 and your other 2 housemates are responsible for the remaining $500. If you are the only person on the lease, then the bank will assess you based on yourself being the responsible party for the entire $750. This is even the case if your housemates have a written agreement with yourself.
Therefore in such a situation, it is paramount that your housemates are also part of the lease agreement with the real estate agency.
Many activities we don’t think about, as we go about life, may now flag you as a potential high-risk loan applicant. Ensure you have all the facts before applying for a loan & get ready with an expert.
Match with the right home loan expert to ensure that you are home loan ready now.