You may have some big ideas when it comes to purchasing property but everything rests on getting that all important mortgage approval. We take a look at 5 common issues with personal finance that can cause roadblocks with banks, and what you can do about them.
Roadblock 1: Credit file
Any reported defaults on loan payments or bills, court writs or a previous history of bankruptcy will show up on your credit file. Some people have adverse credit on file and don’t know it (e.g. from an unpaid Telco bill you forgot about). Unless you have a good explanation, major banks won’t accept an adverse credit history.
What you can do:
If you think you have adverse credit on your file that will hinder your loan application, you can go to the Equifax website, get a copy of your credit report and find out. If your credit file is less than favourable you might consider using a credit repair company to assist with removing these adverse entries.
Adverse credit isn’t necessarily the end of world though – while most banks won’t accept adverse credit history, there are some banks who will lend to you, depending on the severity.
Roadblock 2: Security
The house you’re looking to buy needs to be suitable security for the bank because they’ll be looking at its resale value if you default on your loan. They will assess the risk of taking the property as security, and may take into consideration a number of factors including: a small living space, a bad postcode, unsuitable zoning and a high concentration of dwellings (e.g. a small unit in a large apartment block). Mining areas can also be seen as unsuitable (e.g. Karratha) – when times are good, the return is fantastic, but when things cool off or projects get shut down, there is more risk involved.
If a residential property is deemed to generate some level of business income, major banks might tend to stay clear of it as well. Banks are keen for you buy property to live in but not if you’re going to use it for business purposes. It’s easier to sell a residential dwelling than a semi-commercial one.
What you can do:
Contact your broker and let them know what you’re planning to buy. They will help you ensure it fits a bank’s policy or lending criteria.
Roadblock 3: Employment
The type of employment you’re in can impact your application. If you’re self employed, banks will usually want to see that you’ve successfully run your business for a minimum of two years. Take the example of a plumber that previously worked for someone else but decides to start up his own business, and now wants to buy a house. While his business is going great, because he’s a startup it will impact his ability to borrow money.
The same goes with short term employment. If you have a history with an employer it’s usually not an issue; however, if you’re on a short term contract or still on probation, it can be an issue.
What you can do:
If you have a new business startup, speak with your broker. They can help demonstrate your position to a bank, and will know of other lenders who lend to new business owners without needing a two year trading history.
Roadblock 4: Personal expenses
If you have personal debt with third parties, such as a sibling, it can come back to haunt you. Banks will see this kind of debt as an issue.
Say a husband and wife apply for a housing loan but the wife has an investment property with her sister, and still has debt over it. Rather than apportioning the combined total of the loans between the husband and wife, the bank may need to see in the wife’s personal application that she can service 100% of the existing outstanding loan by herself. This is because while the couple might effectively pay for their total combined debt while they are together, if the marriage dissolves, the husband is not responsible for the investment property and the wife will now have to pay for 100% of this debt plus her share of the joint loan with her husband. While some banks will take a commercial view and apportion the debt, other banks will not. This can make or break an application.
Credit cards can also be an issue especially if you have a large credit limit. Even though you may only have very little owing or pay it off in total each month, a bank will take into account the fact that you may choose to draw down the full amount at any time. Based on this, the bank will calculate serviceability and your borrowing capacity as if the full amount is drawn and you’re making interest payments to match each month.
Also, when you run your own business and you apply for personal finance, banks tend to look at the loans held by the entire group, e.g. business loans, business car loans, plus personal loans, credit card debt and more. Some banks take the view that debt held in a business should be kept separate but it often gets factored in.
What you can do:
Cancel your cards or at least look to reduce your credit card limit as this can have an impact on your application. Business owners be mindful – what you finance for your business can impact on your personal finances.
If you’re finding that affordability is an issue with a bank, your broker can advise on any changes you need to make.
Roadblock 5: Deposit
Not having a sufficient deposit will be a red flag to a bank. People often use online calculators, then go ‘shopping’ for property, not realising they also need to provide a deposit. Plus, there are other costs that need to be factored in, e.g. stamp duty, council rates, water rates, settlement fees etc.
Anytime you borrow 80% or more of the purchase price you’ll find different banks have different tolerances on the source of the deposit. When you’re borrowing over 85-90%, most banks will want at least 5% of the purchase price to be as genuine savings, either accumulated as personal savings in your bank account or as a lump sum held for a minimum period of 3 months prior to the application (and not withdrawn over the course of the period). For the purpose of assessing your borrowing ability, the bank is not particularly interested in the source of the rest of the required deposit (ie beyond 5% of the purchase price).
What you can do:
Speak to your broker, they’ll know the best lenders to approach and what you need to save to meet lending criteria.
Summary
Always talk to your broker before starting your property search to get an realistic estimate of what you can borrow. If you’re having trouble getting finance or if you are not feeling confident about negotiating with your bank, your broker will look at your situation, provide you with guidance and help you navigate around any roadblocks. It’s their job to know which banks are likely to approve your loan and what information is required for the application.