How to get yourself lender ready!
As a mortgage broker I’m often asked whether lenders are currently making it more difficult for applicants to obtain a loan. The answer is banks still want to lend. However, with all lenders having greater focus on meeting the Responsible Lending requirements some borrowers are finding it difficult to obtain an approval. Also, after a major change to what’s reported, credit reports are now providing surprises for some applicants.
My biggest tip is to “get yourself lender ready” by making sure your finances and financial records are well organised well before you apply for finance. Here are three ways you can achieve this:
1. Affordability is based on lender policy not actual numbers:
Some applicants do a budget to demonstrate they can afford the proposed loan repayments. Some are swapping a rent commitment for a similar loan commitment. But when they apply some applicants find they do not qualify for approval?
Why? Lender policy imposes a buffer on loan commitments (at times 50% on top of the actual repayments); does not necessarily take all income at 100% and considers your living expenses when your capacity to service and monthly surplus income is calculated. Therefore, your budget that is based on actual income, commitments and expenses needs a healthy surplus.
While lender policy is one factor that you cannot readily control there is usually a solution for most employment, income and credit history circumstances; perhaps not with your current bank.
You can improve your monthly surplus by rationalising credit card limits and if possible reducing excessive living expenses. Did you know most lenders apply an ongoing monthly commitment at 3% of the limit – so a $20,000 limit becomes a $600 ongoing monthly commitment even if the card is never used? If you do close a card or reduce a limit make sure you obtain clear written evidence of the change to submit with the application.
2. Living expenses is the hot topic
You will be asked to declare your living expenses which are included in your capacity to service calculation. If your declaration is lower than the lender benchmark for your personal situation, they will use their benchmark regardless of your actual circumstances.
Most lenders request three to six months transaction statements to verify income & expenses and check for any undeclared commitments. Start the process now to rationalise and review your transaction accounts. Also, take care not to overdraw an account, exceed the limit and make sure all payments are paid by the due date. In summary, act now to turn potential “untidy” into “tidy”.
Completing a budget can produce a financial benefit by eliminating unnecessary expenses and/or prompting annual review of large costs such insurance, utilities, etc. Also, be mindful that an “After Pay” (or similar lay-by) monthly commitment is added to your ongoing living expenses even though it is technically a two-month payment plan.
3. Check the details on your credit report annually.
Before you apply for a loan contact a credit reporting body directly to obtain a free credit report. Your report will enable you to check what is listed and assist you to guard against identify theft. Latest statistics (ABS) estimate that 106,000 Australians experienced a single incident identify theft in 2014-2015.
Also, credit reports now include all open financial commitments and their history for two years as well as applications and negative events such as defaults.
Closing down a card that you thought had been cancelled but is still open can take several days to resolve if your need to remove the commitment to obtain a loan approval. If you have an adverse listing on your credit file that should not be there it can take several weeks to remove it. If the listing cannot be removed you may still obtain an approval, however, your interest rate and fees are likely to be much higher than “best rate”. Therefore, it is good practice to check your credit file annually.
For more information on credit reporting, Google “Comprehensive Credit Reporting” and go to the Canstar website. Credit reporting agencies include Equifax, illion and Experian.
In conclusion, getting yourself lender ready will give you a better chance of a successful outcome , reduces the time to yes and may identify expense savings. Don’t despair if your current bank cannot assist as there may be a lender that will provide a solution for your current situation. The Reserve Bank recently reported almost six out of ten applicants are using mortgage brokers to assist them with their search for finance. One major reason is brokers have access to multiple lenders and can assess your likely options quickly.
The information provided in this article is general advice only based on recent trends within the finance industry and client experience. A quick discussion with provision of financial details can assess your personal situation in greater detail.