THREE C's OF SUCCESS
When assessing your loan application lenders will want to ensure you pass at least 3 tests before offering you a final approval. Fail any and your loan is doomed. 1. Collateral
Lenders like you to take some risk. Most will be very happy if you contribute 20% or more to the cost of a purchase, either with a cash injection from savings or by using equity from another property. . If you have no or low debt on your home you can use the equity to finance the deposit on a new property. This is often done with a line of credit. Ir will enable you to borrow 100% of the purchase price and cover taxes and renovations without making you liable for lenders’ mortgage insurance (LMI). Lenders will also allow you to use equity in your parents’ home in some circumstances. For those with limited cash and equity, lenders offer loans up to 95% of the purchase price of a property. At this level, the borrowing criteria is tight and lenders want to see a strong savings history and good income. There are added costs when you borrow over 80%. The greatest is lender’s mortgage insurance which can cost thousands of dollars. LMI is designed to protect the lender in case you default on the loan. In most cases it can be added to the loan amount. Many people, buying high capital growth property, know that over time the LMI cost is negligible.. Some lenders will pay the LMI for you, but expect a high interest rate. Show a lender you are prepared to throw some collateral into the deal and you’re a long way to getting that loan. 2. Cash
Lenders require proof that you can afford to repay the loan. It is the one hurdle you must overcome. Lenders use a “serviceability calculator” to test your capacity to repay the loan. Every lender’s calculator will produce a different result. Some are stricter than others. But all your income and expenses are factored into the calculation. If you fail They will not provide you with funds. Many borrowers see low doc loans as a way around this. But lenders still want a signed income declaration and a detailed outline of assets and liabilities. In most instances you need to be self employed and have an ABN for at least 12 months to qualify. Recently, some lenders have introduced a requirement borrowers supply 12 months of Business Activity Statements to support their low doc declaration. Low doc borrowers are generally charged lenders mortgage insurance for borrowing more than 60% of the property. Very few lenders will allow low doc applicants to borrow more than 80% of the purchase price. It is worth remembering that, in times of uncertainty such as the recent financial crisis low doc borrowers become vulnerable to increasing rates. It is also an offence to sign a misleading income statement. Full doc borrowers must show their income is from reliable and stable sources. For fully documented loans you must provide pay slips and tax office assessment notices. Self employed borrowers must provide two years of financial statements. Messy paperwork, missing income statements, confusing documentation causes delays and kills a deal. 3. Character
Lenders want to deal with reputable borrowers and run credit checks as soon as an application is lodged; in many instances it is automatic. One computer talks to another. Some lenders will overlook small or old infractions, but may charge you higher interest rates. If you are borrowing over 80% any black mark on your credit record is likely to have your loan declined. Lenders also like investors who know what they are doing. A resume outlining a history of successful investing along with a clearly defined “business” plan can greatly help your case. It doesn’t have to be book. A couple of paragraphs can provide the individual checking your application with enough insight to understand that you should receive the loan. Putting all these ingredients together into a winning recipe can be difficult and time consuming. A good finance broker can help smooth the way and guide you to the lender best suited to your circumstances. |
