Loan applications present avoidable traps
Some common traps await loan applicants, but financing can be made less complex and more beneficial by following a few words of advice.
With the Commonwealth Bank and other lenders bringing forward to mid-year their estimation of when interest rates will rise, many homeowners will now be looking at paying higher mortgages.
As investors look to apply for a loan, they will be using calculators online to see what their borrowing capacity might be and what those repayments look like. However, until you have your loan approved it’s all a bit of a guessing game.
Here are some common traps awaiting loan applicants:
Not having pre-approval ready
When looking around it's important to have your pre-approval ready to go.
When making an offer, it is necessary to be ready to proceed with the sale should yours be the successful bid. Given there's only a five day cooling off period, or none when buying at auction, a pre-approval is the minimum needed to be in a position to make an offer and proceed.
During the cooling off period, the lender will organise a valuation and finance approval becomes unconditional. Pre-approval will also ensure buyers are looking at properties within their price range.
Applying for pre-approval too soon
Every time you apply for a loan (pre-approval, or any kind of credit for that matter) the application goes on your credit file. If you aren’t ready yet, or you’re applying for something that simply won’t be feasible, your application will go on your credit file whether it is approved or declined.
When re-applying you may not get the approval, as the banks assess what is on your credit file already. They may wonder why there is an application, or multiple large amounts for which you've already applied.
Discussing this matter with a mortgage broker will ensure you are applying for an amount that will most likely be approved, therefore limiting the number of applications that eventuate on your file.
Credit card a liability
The banks will always see credit cards as a liability, even if there is nothing owing on it. The limit of each card will be taken into account and potentially regarded as being that amount of of debt.
You’ve done the hard work in paying it off, so if you can cancel those credit cards before making your application, do it!
If you have multiple cards, cancel all but one, and as an absolute minimum if you must keep one, reduce the limit prior to applying for your home loan.
There are some fantastic rates out there, sometimes with lesser known lenders. A mortgage broker is a fantastic option to review and access these rates and lenders.
Borrowing the maximum of borrowing capacity
This will leave you stretched to make repayments and will close you in at your capacity, meaning you’re unlikely to be able to borrow for another property.
Try to borrow under your borrowing capacity, making for more comfortable loan repayments, and leaving the door open in the future to further investment or renovations without the need to sell the first purchase.
Given the growth in the market, should it continue, healthy equity can enable investors to continue to buy property and build a portfolio.
Think about the kids
It is estimated that lenders will see each dependant as an additional expense of about $2,500. Ensure this is taken into consideration when evaluating budgets and borrowing capacity before applying for a home loan.