Zinger Finance’s Graham Turnbull explains the steps investors should go through to avoid that most painful of burns: getting rejected for a loan
Getting an application for finance approved can be daunting for first-timers and the experienced alike – it is littered with large quantities of paperwork and requires plenty of legwork and patience.
The various parties involved can often add to the confusion. From your broker to the lender, the mortgage insurer to the valuers, each has their own set of requirements that translate into more work for you.
For those who get all their parties aligned and in step with their plan, things run far more smoothly. When helping clients, we often find the same simple, but avoidable, mistakes being made. Understanding and addressing these can better align your team and significantly reduce stress when applying for finance.
Before you start
In many ways, investing in property is similar to running a business. You’d only start a business after fully understanding your financial situation or having a business plan, and it’s no different with investing. You need to know exactly where you are and want to be.
Your ability to accurately answer questions a lender will likely ask while assessing your finance application is crucial. You need up-to-date information that accurately reflects:
- Important information on property assets such as the ownership structure
- Any associated debts and repayment arrangements against the property
- Title particulars and contact details to arrange valuations
These are all details that are readily available and will help a lender make their decision more quickly. This level of knowledge makes it easier for us to determine if there are sufficient funds available for a deposit and to meet closing costs as well as determine borrowing capacity. Importantly, your loan options may be determined by the deposit you have available, and a good broker or finance expert will be able to advise on the deposit you require by estimating the costs involved (such as loan fees, legal costs, and government duties and charges). These usually add up to around 5% of the purchase price.
Your credit file is your passport to finance, and not checking its contents can be detrimental. We strongly recommend reviewing a copy of your credit report so you are aware of what a prospective lender is likely to find out about your credit history and the potential impacts on your application.
Identify irregularities in your credit history early
They won’t necessarily make or break your application, but being upfront about them helps to prepare an appropriate strategy.
Ensure repayments are up to date
If you are refinancing a loan to a different lender, make sure it is in good auorder. Even small loan arrears can be enough for a lender to harbour serious doubts about your credit-worthiness.
Have your income documentation ready
Your broker will be able to tell you what is acceptable (usually it differs between self-employed and PAYG borrowers).
Invest your time
The more time you spend preparing these details for each application, the more time someone else has to beat you to your target property.
Choosing your lender
Many investors prefer to stay in their comfort zone, retaining their existing lender for subsequent loans. By the same token, the lowest interest rate can often be the carrot that attracts an inexperienced investor to a particular lender over another. Generally speaking, the interest rate should not make or break the deal. Lenders can move their rates at any time, even after you’ve committed to them.
Another costly mistake is not knowing how you need your loan to work, now and in the future. Lenders need to know the exact purpose of the loan as this is critical in determining the most suitable strategy for you. Different financial situations and objectives often call for different loan solutions, meaning it is highly unlikely that any one lender will be able to offer the ideal loan for your every situation.
Be prudent in your search and avoid shopping your loan around with too many lenders. Make enough enquiries to create a shortlist (or have a broker do this), but avoid unnecessary applications that incur unnecessary credit hits to your credit file. Excessive applications do not help you, and your broker should advise you accordingly, as this may suggest to your chosen lender that you have been declined by other lenders or that you are not serious about your finances.
Conversely, knowing when to adopt a diversified lending strategy is important. Don’t put your eggs in ‘one lender’ basket. There is a point at which lenders tend to become cautious about their levels of exposure with a single borrower. As a result, they may see you as a risk when all your properties are taken into account (reduced loan-to-value ratio), so diversification can help. A diversified approach also gives you more bargaining power to negotiate terms for that next loan.
The application process
Too many people leave important information off their application. Don’t be one of them.
We know that some people overlook debts they hold jointly or in a different name (eg business name), forgetting that lenders perform credit checks to identify debts for which you might be liable. Many lenders are becoming less tolerant about undisclosed debts, whether intentionally omitted or not. It pays to double-check and be open.
This also applies to overstating income or understating expenses. Ensure your documentation supports the figures you have stated. A lack of evidence will only create unnecessary delays for you.
- Borrowing more than you need. It may be tempting to have funds available for an ‘emergency’, but the extra debt may restrict your ability to borrow for your next loan
- Making new finance enquiries in the middle of your current enquiry, unless absolutely unavoidable. Your loan decision is based on the information you provide to the lender, and making changes can jeopardise it if your position changes significantly. At the very least, it can cause delays pending an explanation of the purpose of the additional enquiry. If at any stage you need to be out of town, have a solution to ensure you are contactable or available to sign documents. Alternatively, nominate someone to act on your behalf.
Once finance is approved
Once you’ve done the hard work and obtained finance approval, don’t jeopardise the settlement by failing to execute your lender’s loan documents correctly. It sounds simple, but your loan contract and mortgage documents are legally binding and can often be complex in nature. If they are not executed correctly, a lender can refuse to accept them no matter how urgently you need your loan settled.
Above all, be diligent and attentive right up to the completion of your settlement. We have seen investors endure settlement delays for the simple reason that a borrower’s signature on the contract didn’t exactly match that on their loan application.
Finally, never sign anything you do not 100% understand. If you are not clear, ask to have it explained. Loan documents can be jargon-heavy. Even if you’ve heard a term before, make sure it means what you think it means before you sign.
Graham Turnbull is a mortgage broker with Zinger Finance and can be reached at email@example.com
Disclaimer: The views provided here are of a general nature only and should not be taken as financial advice. Please speak to a qualified professional before making any financial decision.
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