May 10, 2014
Yew Kong Lye
It's like being hit by a bolt of lightning when your're told that your home loan application has been declined because the bank don't fancy the property you've bought as an acceptable security and that you might lose your deposit. To avoid such pitfalls, you need to having a knowledge of what the banks will accept in terms of security, income, equity, etc before you make a home loan application
If you were applying for a job, It would be very handy to know what your potential employer is looking for and the questions they will ask before you front up for the interview, wouldn’t it? It’s like having all the answers to a multi- million dollar quiz show. It’s equally handy to know what is not favoured by the banks when it comes to home loan applications.
When someone applies for a home loan, he or she needs to understand what the banks are looking for and what constitutes an ideal application. What the banks are looking for is the amount of equity you have to contribute towards the purchase, your ability to repay the loan and what risk they are taking with the security offered.
Bearing that in mind, the lending policies of the banks are all formulated around equity, income and their risk exposure to that particular application. Amongst the most important things to look out for are:
The banks do not like student accommodation, service apartments, apartments less than 40 square meters, properties with a commercial element (e.g dwellings with a shop front), dwellings in a flood zone, properties with power lines in close proximity, properties with acreage (generally more than 5 acres) and properties in country areas with population less than a thousand people.
The reason why these are not favoured securities is for the simple reason that if they need to foreclose on the properties, they are generally less favoured properties in the general market and would have a limited demand. Therefore, the banks will encounter greater problems in disposing the property.
However, if they do lend against such properties, you will find that they will reduce their lending to anywhere between 50 to 80% and certainly no more than 80%. The big lesson here is that, when the banks reduce their lending of any security because of the perceived higher risk, you do not touch it with a toilet brush.
The reason is pretty obvious. When it’s time for you to sell, your potential buyer will encounter similar discrimination from the banks thus limiting your pool of potential buyers and general demand. I have a client who bought a student accommodation and has been trying to sell it for more than 12 months now.
When in doubt as to whether the security is acceptable or of limited appeal to the bank, call your mortgage broker who can very quickly get you an answer and save you a lot of pain.
Your ability to repay a loan is of the utmost interest to a bank when you’re applying for a home loan. When you’re a PAYG employee with a set income and employment history of 2 years or more, you’ll generally have very few issues with the banks.
If a significant component of your income comprise of commission, bonuses or ever time, the case of determining income from a bank perspective is more complex. It gets more complicated when you are self-employed. Different bank has different policies in determining your income to qualify for the loan that you’re seeking e.g. if your bonuses are not consistent, they may totally ignore it.
When you’re self- employed, the income that the bank will be what is declared in your tax returns. Very often a self-employed have no idea what his income is and will quote what his turnover is. This is not what the bank will use. They have different ways of arriving at that income after various add- backs.
If you’re self- employed or your income has significant component of overtime, commission or bonuses , do not sign a contract to purchase a property till you have organised a pre-approval. That way, you have a bank who has already looked at your income and confirmed its validity.
When you’re buying a property, the bank like to see that you’re putting in a bit of “hurt money”. Depending on the bank and situation, sometimes it can be as little as 5% of the purchase price. This cannot be borrowed funds and if you’re a first home buyer, it needs to be demonstrated that the 5 % is saved over a period of at least 3 months.
If that 5% is a gift from a family member, do not go out a sign a contract to purchase a home immediately-you will get knocked back for a home loan even if you have the necessary income to qualify. This is because the 5% needs to be genuine savings over a 3 month period. However, if the 5 % gift is left sitting in your account for 3 months or more, then the banks will consider that as genuine savings. Yes, that’s how arbitrary it can get.
It’s important to know how the game of a loan application is played, the rules that must be observed and what needs to be complied with, so that there are no surprises in the end and
pitfalls can be avoided. When Christopher Hitchens said “ I like surprises” I’m sure he didn’t mean buying a home in a 1 in 50 years flood plain and finding that no banks would give him a mortgage.
To avoid surprises and pitfalls, call 0413 871 888