Whether you’re a first home buyer or an experienced investor, there are several home loan application mistakes that can be made by anyone. Understanding these mistakes, and how to avoid them, will give you the best possible chance at having your loan application approved by a lender.
Here are a few of the most common home loan application mistakes and how you can avoid them.
Bidding at auction without preapproval
The mistake
One of the biggest mistakes you can make as a homebuyer is thinking with your heart and not your head. Going to an auction and bidding without having preapproval from the bank is an extremely risky move. Regardless of how much you love the house, and how much you think you can borrow, once that ‘sold’ hammer goes down, the property is yours. After an initial rush of excitement, the reality of your decision will start to sink in.
Bidding at auction (and winning) is legally binding. Being the winning bidder means you have purchased the property unconditionally. This means you need to sign a contract of sale after the auction and pay the deposit on the spot, which typically ranges between 10 and 20 per cent of the purchase price.
How to avoid it
Before you raise your bidding paddle at auction, you need to make sure you fully understand how an auction works. Winning means there’s no cooling-off period, no subject to finance clause and a building and pest inspection would have needed to be done prior, should you have wanted one. From a financial perspective, getting preapproval will ensure you know how much a bank is willing to lend you. This puts you in a much safer position and allows you to bid within your limits.
Not knowing your credit score
The mistake
Not knowing your credit score may come as a shock if your application is declined.
Your credit score and history are some of the very first things a lender will look at when assessing your application. Having a poor credit history — such as deferring or defaulting on a loan or missing repayments — means you’re more of a risk in the lender’s eyes.
How to avoid it
The easiest way to avoid this common home loan application mistake is to do your research. You can easily find your credit score on free sites such as ClearScore and Equifax. Understanding what makes up a good credit score is also important. In Australia, any score below 500 is considered a bad score and a score below 400 is very bad. If your credit score isn’t great, you can look at your short fall, including missed repayments and any debt you have. A mortgage broker will help you to rectify this and get your score into shape.
Underestimating the costs of purchasing
The mistake
For first home buyers especially, it’s an easy mistake to underestimate the costs associated with purchasing a house. The costs stem beyond your deposit and how much you can borrow and include a range of other fees during the process.
How to avoid it
When applying for a home loan, you can expect to pay:
- The deposit
- Lender’s mortgage insurance (LMI) for those without a 20 per cent deposit
- Stamp duty
- Settlement costs
- Building and pest inspection fees
- Conveyancing fees
While these costs will vary based on circumstance, they’re all standard in purchasing a home. Stamp duty and LMI are large expenses that are often left unaccounted for when saving for a house. Being aware of these costs, and including them in your budget, means you won’t be surprised later when they pop up.
To learn more about lenders’ mortgage insurance, head to our blog.
Inaccurately reporting expenses and income
The mistake
Applying for a home loan puts your finances under the microscope. However, just like lying on a resume, misrepresenting your finances and income can cause a whole lot of trouble for you. Besides, lenders have ways to view your finances, so there’s nothing you’ll be able to hide for long!
How to avoid it
Simple – make sure you’re reporting honestly. Lenders will require income statements from employers as well as access to your bank statements for review. Having consistent savings is also important, as it shows you can save money over an extended period. If you make a mistake on your application, let your broker or lender know as soon as possible.
Not using a mortgage broker
The mistake
When applying for a home loan, many of us make the mistake of applying to the lender our current finances are managed through, without considering other options. Trying to do it yourself can cause confusion and may leave you feeling unsure as to whether you’re getting the best deal.
How to avoid it
Using a mortgage broker not only simplifies the process for you but also ensures you’re getting the best deal. Mortgage brokers have access to a range of lenders and deals – some that aren’t available to the public. They can also explain the process to you, as well as answer any questions you may have. As a third party in the home loan application process, they’re handy to have as they provide you with unbiased opinions.
Submitting too many applications
The mistake
Although considering other options may appear like the right thing to do, applying for too many loans can hurt your chances of being granted one. Every loan you apply for will be added to your credit report – even if you don’t take up that mortgage. Lenders can see this when they investigate your credit history. They may assume that you were rejected for those loans and deny your application — creating a vicious cycle.
How to avoid it
When you’re ready to commit, only apply for one home loan. A mortgage broker can talk you through different lenders to help you to find one that suits your needs, before guiding you through the application process. This eliminates bulk applications being made on your behalf.
Applying when you’re not financially stable
The mistake
If you’re going through a major life change or aren’t currently financially stable, applying for a home loan isn’t a good idea. This could be during an employment probation period, switching jobs or going through a period of unemployment. Other red flags for lenders include making large purchases (such as buying a new car) right before applying for a home loan, credit card debt or even HECS debt. Adding more debt to your name increases your overall debt-to-income ratio – one of the most crucial factors lenders use to assess your application. The higher your debt-to-income ratio is, the lower the chances of you getting approved or getting a sufficient loan amount.
How to avoid it
Before applying for a home loan, consider your current financial position. Are you in a stable job and have been there for a period longer than six months? Do you have genuine savings and make all debt repayments on time? Your mortgage broker will be able to guide you through any red flags your application may be giving off and help you to rectify them.
Having high credit card limits
The mistake
Whether you use it or not, having a credit card with high limits may affect your borrowing power. RateSeeker uses the following example: “Someone with a $15,000 credit limit and someone with a $35,000 credit limit may have a different maximum borrowing capacity – even if they have the same deposit and income amount. This is because lenders will apply a rate of 3.8% on the credit card limit as an additional expense.”
How to avoid it
Contact your credit card provider and reduce your limit as much as possible. This can significantly increase your borrowing power. It’s also important to pay off as much credit card debt as possible before submitting your home loan application.
There are several home loan application mistakes first and experienced home buyers alike can make. Using the guidance of a mortgage broker to navigate you through the buying process will increase your chances of having your application approved. If you’re ready to get started on your home loan application, talk to one of our team today.
