Question: A year ago I applied for a personal loan. In order to ensure I got the best rate and product, I applied to about six different lenders. I only took up the one loan and I have made all my payments on time. I did a similar thing when I took up a credit card about seven months ago. I did my research and was offered about five different credit cards but I only took up one.
When I recently applied for a home loan I was told that my loan application was declined because I had too many enquiries on my credit report. It didn’t seem to matter that I hadn’t taken up the loans, just that I had applied for them. Is there anything I can do improve my chances of getting a loan?
Answer: You have raised a good point. Every time you apply for a home loan, credit card, personal loan or even one of those “interest free” credit contracts, the finance company or lender makes an enquiry on your credit report. Your credit report therefore records all your credit application history over the last five years. Whilst your credit report doesn’t show whether you actually took up any offer of finance, it does show if you have any listed defaults, court judgments or bankruptcy notices.
This information, together with your credit application history, feeds into your credit score. This credit score is relevant as it feeds into a lender’s (and mortgage insurer’s) decision whether or not to approve your loan. As a rule of thumb, if a credit report shows many recent credit inquiries, the credit score is lower.
As you are looking to borrow more than 80% of the purchase price – regardless of whether you choose to go with a bank, building society, credit union or non-bank lender, your loan will have to be mortgage insured by the lender. The mortgage insurer will also conduct their own credit inquiry (making yet another “hit” on your credit report). Because the mortgage insurer is taking on most of the risk, it is generally the mortgage insurer that will want to avoid taking on borrowers with low credit scores. This means that on some occasions, even if a lender is happy with your credit report your application may be declined if it doesn’t meet the mortgage insurer’s requirements.
The more deposit that you have, the less of a risk you are to lenders and mortgage insurers in the event that you default on your loan. By saving more of a deposit, you would improve your chances of getting your loan approved next time. A good step might also be to get a copy of your credit report from Veda Advantage. This can help you to become more informed about your credit application history and to see if there are any negative notations (like defaults) or errors listed that you don’t know about.
Telecommunications and utility companies also subscribe to Veda Advantage and conduct credit enquiries on clients. They also record defaults in the event you haven’t paid your phone or utility bill. Many people don’t even know a default is listed on their credit report until they apply for credit and get declined.
Make sure you don’t make the same mistake by applying to multiply home loan lenders at the same time. Do your research online or on the phone before making an application and then only apply to one lender at a time.
Answer supplied by Heidi Armstrong, State Custodians Mortgage Company (www.statecustodians.com.au)
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