7 Common home loan application mistakes (and how to avoid them)
Are you applying for a home loan or mortgage refinance and worried your application might be declined?
You need to avoid the seven common mistakes that people make when they apply for a home loan.
Lending criteria is getting stricter, so it’s important to make sure you put your best foot forward when you apply for home loan or mortgage refinance.
Mistake 1: Bidding at auction without sorting out your finance first
If you’re even considering buying a property at an auction, you want to organise a home loan pre-approval (also known as conditional approval). It’s very dangerous to buy property at an auction without having your finance sorted first.
When you buy a property at an auction and you’re the winning bidder, you’re buying the property unconditionally, it’s not subject to finance. After the auction, the winning bidder signs a contract of sale and needs to pay a deposit. The deposit is usually around 10% of the purchase price.
If you don’t already have your finance sorted, you’re putting yourself in a really hairy position.
You’ll have to pay hefty penalties, such as forfeiting your deposit if you’re unable to complete the sale.
You need to start preparing your home loan finance a minimum of two to three weeks before the auction two weeks.
If we start preparing your finance three weeks before the auction, we may be able to secure formal approval. As part of the formal approval process, the bank (lender) will value the home you’re looking to purchase. So then, you know how much the lender values the property at and can bid with confidence.
However, if we can’t get to the formal approval stage before the auction, conditional approval is still acceptable. It’s better than nothing. At least the bank has a chance to assess the amount you’re looking to borrow, and we can give them an estimate of the value of the property you’re looking to purchase.
Mistake 2: Not knowing what’s in your credit file
Do you know what’s in your credit file?… If your answer is, no, you’re not alone. It’s pretty common for people to be unaware of what’s in their credit file. And sometimes, unfortunately, people don’t find out that there’s something negative in their file until they apply for a home loan and their application is declined.
Lenders will conduct a credit check on people applying for finance. The credit check is part of their due diligence when they assess your home loan application.
For example, If you’ve been recorded for default, it’s best to get onto it straight away and have it addressed with the organisation that have defaulted you. A recorded default on your credit file can be a deal-breaker when you’re applying for finance.
In some cases, we may be able to work around your default. If you’ve got a default listed on your credit file, and you don’t know what to do, please get in touch with Carl.
It’s wise to try to remove that payment default from your credit file. Even if you’ve paid the credit default, it’s still recorded as a default on your credit file.
If you have a credit default, or a credit default payment sitting on your credit file that you’re aware of, organisations such as Clean Credit may be able to help you remove defaults that are sitting on your file.
To find out what’s in your credit file, go to Equifax Australia. Equifax will provide you with one free credit report every 12 months.
Quick note: We’re not affiliated with Equifax or Clean Credit. They don’t pay us a fee or any kind of commission. However, we’ve used their services and find it to be effective and reliable.
Mistake 3: Applying for a home loan solely based on the interest rate
Sorry to be the bearer of bad news but… not all banks that offer low-interest rate home loans are going to apply to all borrowers.
Just because a bank is offering a low interest rate home loan, doesn’t mean you’re eligible for that home loan.
A bank might be offering a home loan interest rate of 2.89%. Which is very, very nice, LOW interest rate. But, there might be a little asterisk in little fine print saying, ‘we only accept a loan to value ratio of 80%’.
If you apply for that loan and you don’t have the 20% deposit, your application will be declined. That decline will be recorded on your credit file, which could jeopardise your chances of securing finance in the future.
Or perhaps you meet the lending criteria, but the loan doesn’t have a redraw facility available, and you require access to that feature.
You need to look beyond the interest rate. It’s essential to check the fine print and understand what the fine print means.
This is where your Mortgage Broker comes in. Your Mortgage Broker will assess your circumstances. An excellent Mortgage Broker will have a deep understanding of lending policy and criteria; which means they can match you with home loan products you’re eligible for that will also meet your needs.
Mistake 4: Missing mortgage repayments or being behind on your rates
Missing two repayments in the past on your home loan, or being behind on your rates could cause a decline on your home loan refinance application.
Lenders look at your ‘account conduct’ when they assess a loan application. If you’ve missed repayments on your home loan or your bank account has been overdrawn, the lender will usually decline your application.
You need to make sure your home loan account is really well maintained if you want to refinance with your current lender. Otherwise, you may need to wait a certain period of time and then move your home loan to another lender.
Most lenders will want to see a copy of your rates notice, as part of assessing your home loan application. If they see that you’re behind in your rate, they’ll want to know why you’re behind.
If you’re only behind by one instalment and you can pay it, confirm that you’ve paid it and give a good reason as to why it was late, generally the lender will allow that to go through. However, if you’re thousands of dollars behind, your application will likely be declined.
Mistake 5: Not structuring genuine savings correctly
When you purchase a property you need to pay a deposit. Most lenders prefer a 20% deposit. Deposits under 20% Lenders Mortgage Insurance (LMI) will apply. LMI provides protection to the lender in case you default on your home loan. It’s a one-off charge that usually gets included in your loan amount.
The lenders mortgage insurer will want to verify your deposit as ‘genuinely saved’. So not only do you need to meet the lender’s assessment criteria you also need to meet the lenders mortgage insurer’s policy.
A common mistake people make is they don’t hold their savings for long enough. And they don’t leave those savings untouched.
It’s wise to keep your home loan deposit in its own separate savings separate account. You don’t want to keep your deposit in your everyday transaction account. There’s a chance that it could be misconstrued as not genuine savings because of the number of transactions going in and out of your everyday account.
Open up a separate bank account, put the deposit in there and let it sit there for three months.
Check out Carl’s video on genuine savings.
Mistake 6: Applying for a home loan during employment probation
Your home loan may not be approved if you’re still in the probationary period with your new employer.
A lot of people get excited when they get a good job. They’re earning the big bucks. And they want to do something positive with it, such as buying a property. However, many lenders, particularly when the loan has Lenders Mortgage Insurance, won’t approve a home loan application if you’re in the probationary period with your employer.
There is an exception to this, though. If you haven’t changed industries, if your new role is exactly the same as your previous role, you’ve just changed employers, that’s perfectly alright.
For example, if you’re a hairdresser and you’ve moved from one salon to another, this won’t affect your home loan application. But, if you were a flight attendant for example and you change employment and become a bank teller, they’re completely different industries.
Mistake 7: Having high credit card limits
Having a high credit limit on your credit card will reduce the amount of money you can borrow. Even if you don’t use the limit on your credit card, it will still negatively affect your borrowing power.
For example, meet John (not a real person). John has a credit card with a limit of $35,000, and he’s applying for a home loan. The bank will factor in 3.8% of that limit when they assess John’s home loan application. Which means the bank will allocate $1,330 as a liability against that credit card when they assess his home loan application.
That $1330 is going to have a massive impact on John’s maximum borrowing potential. The credit card limit could potentially take $300,000 – $350,000 off John’s maximum borrowing potential. That’s a huge difference, right?
To avoid making this mistake, reduce your credit card limit. In John’s case, he doesn’t need the $35,000 credit limit. If John were to reduce his credit card limit to $3,000, the bank would only allocate $114 as a liability for that card rather than $1,330. This will make a huge difference in how much he can borrow.
There you have it, the seven common mistakes that people make when they apply for a home loan.
If you can avoid these mistakes:
- you’ll improve your chances of your home loan being approved,
- you may increase how much you can borrow,
- and you’ll likely increase your options, so you’ll have more banks and lenders to choose from.
These seven common mistakes are very general, and really, this is only the tip of the iceberg.
Every lender has different assessment criteria and policy, which they often change. Unless you live and breathe home loans, it’s virtually impossible to keep up-to-date with the changes and deeply understand what each individual lender is looking for when they assess home loan applications.
This is where professional advice and support is absolutely critical. A skilled and experienced Mortgage Broker like Carl, will assess your circumstances, match you with lenders whose home loan products will meet your needs (and that you’re eligible for) let you know what you need to do to make your home loan application as attractive as possible.
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