Are you contacting banks to find out how much you can borrow for that next property purchase? Stop now and read this article, before you ruin your chances of gaining approval for a mortgage.
While it’s prudent to do your research on how much you can borrow, and which lender provides the cheapest home loan to suit your needs, investors have been warned not to go through the pre-approval or credit enquiry process simply out of curiosity – as this could seriously tarnish your credit record.
Accordign to Smartline, seeking a formal pre-approval puts a credit enquiry on your individual client record. If this record shows too many credit enquiries within a short timeframe, then banks will view you negatively as somebody who has been “shopping for credit”.
“Lenders use a complex process called credit scoring when assessing your application for finance,” said Smartline state manager, NSW & ACT, Michael Daniels. “Over the past year or two we have seen lenders place increasing emphasis on using credit scoring when considering borrowers’ applications.
“While many elements are considered when determining a person’s credit score, numerous credit enquiries can considerably lower your credit score and damage your chances of securing a loan approval when you are ready.”
He went on to use the example of a client who was looking to buy a $490,000 two-bedroom unit at an LVR of 90%. Their borrowing capacity was roughly double what they asked for based on their income and liabilities, but the bank turned them down based on their credit score. In short, they had too much activity on their credit report, having applied for credit five times in a 12 month period with four different banks.
All is not lost
But if you do fall into the “shopping for credit” blacklist, then all is not lost. The client in question was able to sign a statutory declaration confirming that they didn’t proceed with any of the many credit applications on their record, and their loan was ultimately approved.
“We have found that three or more credit enquiries will score poorly with most lenders, leading to automatic declines,” said Daniels.
“Borrowers who receive decline notices will want to know how they can improve their credit score. While the exact formulas used are a tightly held secret, there are some basics that everyone can do to ensure they have the best credit score possible.
“This includes a few fundamentals such as making minimal credit enquiries and pre-approval applications, having a sound level of assets and maintaining a good length of employment or continuous employment.”