It pays to get fit!
Lenders are in the business of lending money and making a profit, and so they are very conscious of minimising their risk.
They are looking for financially responsible applicants. They have statistics to prove that certain behaviours, trigger more loan defaults. Using this data, they have become more analytical in the assessment process.
How do you become a preferred loan applicant?
Start your preparations six months before you apply for a loan:
Pay your bills on time, avoid overspending, and demonstrate financial discipline (there’s the ‘delaying gratification’ idea again!) by saving consistently.
Pay your car loans, personal loans and existing mortgages on time. Dishonour fees and reversals are regarded as defaults.
Credit cards – avoid going over the limit. Late fees and exceeding your limit is assessed as delinquent behaviour when conducting a home loan assessment. Most lenders require a copy of recent credit card statements as part of the required supporting documents accompanying the loan application.
Select a credit card limit that you can repay in full monthly to avoid interest charges- it demonstrates to the lender that you are not living beyond your means. When the lenders assess your home loan application, high credit limits absorb some of your available funds for servicing other loans. Your loan serviceability is evaluated on the limits of the credit cards, not the outstanding balance. Reduce your credit card limits where possible to increase your borrowing capacity.
Pay your Council Rates on time, any arrears shown on council rates notices affect the assessment of the application.
Phone, gas & electricity accounts – make sure you talk to the providers if you have a dispute. Utility providers will place a default on your CRAA (Credit Reference Agency of Australia) when the account remains unpaid. If this occurs, you will have problems when applying for home loans, and your application may be declined. A default remains on your CRAA for five and in some circumstances, seven years.
Avoid overdrawing on your everyday transaction account. Make sure you have sufficient funds to cover all withdrawals otherwise delay the transaction that will take you into an overdrawn balance until you have adequate funds to cover the purchase or withdrawal. Regularly monitor your balance.
Never submit multiple loan applications for the same loan. Each application submitted is recorded on your CRAA report, even if you do not proceed with the loan. The lenders and mortgage insurers access your CRAA report for each loan application. The CRAA report is held by an agency that records all loan enquiries in Australia within the previous five years for every borrower. Simultaneous duplicated loan applications can result in a decline that may not have occurred had you just submitted one loan application.
Start a savings program to demonstrate that you can live responsibly and within your means and that you have spare funds to service the repayments on any new loan.
Any additional repayments on existing loans are also viewed favourably and demonstrate responsible financial management. Parts of your deposit can come from sources like gifts, financial windfalls, or inheritances, but most lenders will want to see at least 5% coming from genuine savings. Genuine savings are funds you’ve held in your account for at least three months.
Lenders will need to examine your work situation to determine that you have a steady source of income. The way your income is assessed will depend on your type of employment. They are looking for consistency and reliability of your income-earning capacity. Changing jobs just before applying for a loan or during an application process (even after pre-approval) may mean being disqualified. Exceptions apply if the job change is within the same industry or is a promotion with higher pay.
Similarly, you should avoid making any new applications for finance before the lender funds your loan – doing so may take you back to square one! Always check with your financial representative as to what the policy regarding new credit is and what effect it may have on your approval.
The purpose of the loan is important too. If the loan is for investment in property, the rental income will be considered and assist in boosting your borrowing capacity. Lenders will ask for a rental appraisal from a registered agent. If the agent provides a rent range, the lender will work on the lower figure.
Good credit habits will enable you to grow your wealth more quickly, and you will be a preferred loan applicant when borrowing to purchase property to either occupy yourself or to build an investment portfolio.
Having access to a specialist broker, who is conversant with the different lender criteria for assessing applicants is crucial. You may be familiar with your bank, perhaps one of the ‘big 4’ but remember you are subject to their specific benchmarks and there is no room to negotiate. Having access to multiple lenders means finding the right fit for your circumstances.
Given the tightening of lending criteria over the last few years, engineered in part by the prudential regulator’s requirement for ‘responsible lending’, the burden of proof has escalated to new heights.
Be prepared to supply lots of detail and paperwork.
You have to ‘jump through more hoops’ than ever before, but if approved, you can consider yourself, indeed, creditworthy.