APRA reaches out to major banks as housing credit picks up
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If you are looking for that dream home or investment property, it pays dividends to be well prepared from the outset, especially for those people who will require a mortgage.
Blogger: Richard Symes, CEO, Credit Repair Australia
Despite banks being more willing to lend over the past 6 years, this doesn’t guarantee loan approval success. I know, as I encounter first hand the multitudes of Australians who are getting rejected for home loans, even if they can afford the repayments!
So what should you consider prior to bidding for that dream home?
When looking for a property, everything can happen very quickly and it is easy to get swept up in the moment, even before your finance is approved. By taking your time and ensuring that the necessary checks are made, you position yourself with the best chance of getting approval for that loan.
Tip 1 - Demonstrate savings
It’s not rocket science, I acknowledge, but banks like to see that you can save. By demonstrating your ability to save, lenders have greater confidence in your ability to pay off your mortgage. With current market conditions, it can be extremely difficult getting approval for a loan with any less than demonstrated savings of 5%. Ideally, banks prefer to see demonstrated savings of 10% - 20% of the value of the loan.
Some budding homebuyers may say, “But I have money in the bank now! Doesn’t that count?”
It depends. The banks recognise savings as finance that has been in your account and untouched for a period of 3-6 months. Otherwise a parent / friend / colleague could just deposit the funds for a week prior to the bank inspection of your finances, with the view of withdrawing it shortly after loan approval!
So, aim to have the funds in your account for at least 3 months prior to applying for a home loan. Better yet, aim for incremental increases in the balance of this account, which demonstrates that you are an efficient saver. I also recommend having this decline over time).
Having demonstrated saving implies that you have enough disposable income to withstand external shocks such as rate rises. I regularly encounter Australians who have come into financial trouble due to external shock or changes in their income that they didn’t account for. Lenders will consider not only your savings track record, but that you can weather such ‘shocks’ as well.
Tip 2 – Ask yourself, “Can I service the loan?”
Lenders want to ensure that you can appropriately service the loan. They look at a variety of areas such as the size and security of your income, any existing debt, and the number and size of credit applications you have.
If your income isn’t large enough to adequately repay the loan and leave you with enough disposable income to provide essentials for yourself or your family, then – somewhat obviously - you are unlikely to be able to service the loan. I know that some people believe they can live on bread and water and so reduce their expenses to meet the loan repayments – however, the banks won’t view your earnestness to live so modestly as sufficient for loan approval!
Furthermore, lenders prefer to see that your income is stable. Typically, lenders consider 'stable’ as those borrowers who have been with their current employer for 2 years or more. If you’re self-employed, lenders like to see that you have been in business for at least 2 years.
Tip 3 - Sort out issues with your Credit Report
Your credit file can play a decisive factor in getting approval. That said, most budding home buyers and real estate investors have little idea of how they score on their credit reports.
The simple maths is that if you have a low credit score, you are much less likely to secure a home loan.
Black marks on your credit file – often arising from a missed bill or credit card payment some time in the previous 5 years…yes, that long! - heavily impact your chances of loan approval. So, get to know what is on your credit report. There are plenty of free sources for this (including Credit Repair Australia). By knowing what is on your file before applying for a loan, you can assess whether you need to deal with any ‘black marks’. Not all black marks can be removed – some people do have to wait the full 5 years for them to disappear – but there are many that can be. Either way, budding home buyers ought to see if their credit reports are ‘clean’, and if not, ask whether they can remove the ‘black marks’ either by themselves, or through an expert.