There is often quite a lot of confusion surrounding Lenders Mortgage Insurance (LMI). Lenders mortgage insurance or LMI as it’s commonly referred to, is one of the biggest misconceptions in property investing. However it could be one of the most important tools to grow and accelerate your property portfolio. In this four part series, I’ve delved into the issue for you.
In Part One we explored what exactly lenders mortgage insurance is, when it may apply, and what it looks like. Now let’s take a look at how LMI may affect your loan.
How does LMI affect my loan?
Apart from the obvious fact that LMI adds a cost to your loan and purchase, it also affects the loan approval process. Not only does your application have to be approved by the lender, the mortgage insurer will also need to approve your loan application. Mortgage insurers are much more conservative because they are now taking on the higher risk associated with loans at higher LVR. Because of this, insurers have different, more stringent, policies that override the lenders, as they will absorb any loss incurred if you were to default on your loan.
This means that insurers have much tighter credit scoring requirements that take into account a range of things including:
· Length & type of employment
· Amount of personal debt you have
· Amount of credit enquiries against your name
· Exposure with each insurer
· Type and location of security property
Being smart about property choice is important, but being savvy about managing your own credit worthiness is critical. If you don’t properly manage your credit worthiness you have less chance of getting approved if you opt to use LMI.
Insurers have a greater scope of knowing your lending history as they can see you across different lenders at different times. Being able to track your history and exposure with each of the insurers can make a difference to the assessment of your application. For example, If you were declined by one insurer, say Genworth with Westpac, because you were constantly late with your credit card payments, then decided to submit an application to another lender that didn’t require or see your credit card statements, but used Genworth, you be almost guaranteed to be declined as they would see everything from your Westpac relationship.
In cases that applicants have been careless or unaware of their credit worthiness, it’s common that they are be approved by their lender, but then sorely disappointed when the bank’s mortgage insurer declines the application due to the more stringent criteria. It is interesting to note that in cases of the few lenders that hold their own in-house sign off on behalf of the insurers (subject to certain criteria being met) applications can be approved by LMI and the lender, but if the applicants were to approach a lender that didn’t have in-house authority, but used the same insurer, the application could be declined.
It’s also important to understand that by involving LMI as part of the loan application process, it will add extra time to the processing of your loan application. This is because once the lender checks the loan, it is subsequently sent to the Insurer for assessment; it’s an additional stage in the process. Applicants with LMI loans are typically required to provide more supporting documents, which lengthens the turnaround timeframes as they have to collate more documents, which means that there is more information to review, and question.
Check back in for Part Three where we’ll examine the power LMI in certain cases, and also what it means for your return on investment (ROI).
Michelle Coleman is a first-rate mortgage strategist and mum, and she heads up the team at W Financial. She is without a doubt, a legend of the Australian mortgage broking industry, having achieved over $500M of settlements in her 12+ year career to date, and won numerous industry awards, including #3 MPA Top Broker. Michelle is also a highly experienced property investor. www.wfinancial.com.au
To see the rest of this series and to read more Expert Advice articles by Michelle, click here
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.