While getting rejected by your bank might not be as painful as confessing your unreciprocated undying love, it can still be pretty heartbreaking. A home is more than mortgage to borrowers, so to save up for your dream home only to have your mortgage application declined, can be defeating.
These are the main reasons Aussie homebuyers get their home loans rejected and how you can avoid the heartbreak.
CAPACITY TO SERVICE LOAN
This isn’t about whether or not you physically can repay your home loan, but whether it is realistic to your lifestyle. Sure, you can promise to never eat out or to cut your own hair but let’s be honest, that isn’t entirely realistic. And the banks factor that in.
“It is really that balance of [the borrower] maintaining their lifestyle — the cost of that, their income, and then whatever they have left to service the loan,” ME Bank Head of Home Loans, Patrick Nolan told news.com.au.
“How much of your income are you using to maintain your lifestyle per week? We look at those expenses and marry that up to your income. Then in addition to that we look at how much you can afford to service that loan and those repayments.”
On top of determining if you can realistically afford it, the banks will also want to see evidence of genuine savings. This point is particularly important right now with younger generations increasingly relying on parents to help out with a deposit.
If your parents have gifted you the cash to help you get onto the property ladder, that doesn’t necessarily mean you will be approved. You have to prove you can afford a mortgage and manage money by yourself.
“You might be asset rich or your might have cash — for example, you might have just received inheritance — but the bank will not only take that into consideration,” Mr Nolan said.
“They also really want to be able to see your savings history and see if you have got an ability and a capacity to save. That’s where they may ask to look at your transaction accounts or some of your other accounts. A customer must be able to prove they can save over a period of time.”
DODGY CREDIT HISTORY
This should be pretty obvious but if you have a tainted credit history then it is going to raise red flags. What may not be so obvious is that the banks will look at your internal and external credit history, meaning your history both within the banks (credit card or loan defaults) and outside the banks (outstanding bills).
“There is a lot of data and a lot of science behind this that really illustrates that your previous history is usually a very strong indicator of how you will perform going forward,” Mr Nolan said.
But while this is hugely important, the good news is that an adverse credit history is not the end of the world. You can still successfully apply for a home loan if you understand your credit history. This includes actually knowing your credit score and what’s on your file and being proactive about it.
“The real opportunity for a customer if they have had a ‘black mark’ is to establish and be able to demonstrate a really good savings pattern. And then, in that situation, to be able to explain to the bank why that event occurred which meant you weren’t able to pay off that loan or that debt owed and to illustrate what has changed between now and then.”
Checking your own credit history prior to applying for a loan is also important because there can sometimes be mistakes.
“If you’ve got something on your credit history which is not right, you do have the opportunity to correct it to ensure it is not reflecting poorly on your ability to take out a loan,” Mr Nolan said.
Banks aren’t big risk-takers so if they don’t think it is a wise investment, they won’t approve your loan or they’ll make it harder for you to borrow. This means where you want to buy or what type of property you want to buy could affect your chances of being approved.
A major example of this currently is apartments in inner-city areas where there are concerns of oversupply.
“There has been a bit of a boom in the building of [apartments], particularly in Melbourne, Sydney and Brisbane. A lot of the banks now in the CBD area want to understand who built the developments, what it looks like and how many apartments are in there so they can get a handle of what that looks like,” Mr Nolan told news.com.au.
Another example is mining towns in Western Australia and Queensland, where employment and house prices are declining due to the mining downturn.
“They needed a lot of people to come in to those areas to build the infrastructure and there was a lot of population growth but the community is now starting to shrink. They have built that infrastructure but they don’t need people to run those facilities they’ve built.”
Last month, news.com.au reported on NAB sending out a list to mortgage brokers of 600 “risky” suburbs and towns where it would be hiking its minimum deposits.
UNACCEPTABLE LOAN STRUCTURE
The type of loan you might want, or think you might need, can also affect your chances of being approved. Again, this comes back to risk and the banking sector’s prudent approach to assessing risk.
The most common reason a first homebuyer gets rejected because of loan structure, according to Mr Nolan, is the assumption they can borrow more than they actually can, i.e. a higher loan-to-valuation ratio (LVR).
“There was a period a couple of years ago where institutions like ourselves would lend up to 100 per cent LVR, so you were borrowing 100 per cent of your debt.
“But that has wound back now. A lot of institutions are sitting at the 95 per cent mark and even below. If you are a first homebuyer and you are wanting to lend 100 per cent of your loan, then that is something that a number of institutions today probably won’t take the risk on.”
The other big one is wanting interest-only loan structure, whereby you only have to repay the interest charges for a specified period of time.
Interest-only loans are more commonly used by investors and can be useful for tax purposes — as the interest can be claimed as a tax deduction — or because they only plan on holding onto the property for a short time before selling. It can also free up money for investors to invest there money elsewhere, which may not be tax deductible.
An interest-only structure can, in certain cases, also be helpful for owner-occupiers to help them get onto the property ladder or enable them to take out home renovations.
However, generally speaking, it is better to try and actually pay down your mortgage. This means banks will reject applications for interest-only loans if there isn’t a valid reason for that type of loan structure. “The interest-only terms are a big one,” Mr Nolan told news.com.au.
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Original article courtesy of News.com at http://www.news.com.au/finance/real-estate/buying/top-reasons-why-aussie…