Get Your Home Loan Approved

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1 How To Get Your Home Loan Approved Everytime!

2 Getting a home loan can be a murky affair especially if you don t fit into a lender s standard borrower profile. This article looks at the options available for your situation and shows you how to frame your application to ensure success. Seeking out a loan regardless of whether it s for your home or for an investment property can be a minefield. With hundreds of products on the market from a sizeable cast of major banks, second-tier banks and non-bank lenders, it s a tough call just selecting a shortlist of loans. However, once you incorporate ever-changing lender policies, finding the best deal for you makes trying to find a needle in a haystack an easy job. Read on for the inside story on: Getting a loan if you re self-employed Exactly how you should explain that late bill payment three years ago Which lenders will take all of your end of year bonus into account How to borrow up to 95% 03

3 Self Employed You might be your own boss but the bank just sees you as a potential bankrupt. What do you need to do to convince them that you re a safe bet? The Inside Track The trick with most lenders if you re self-employed is that you ve typically got to have at least two years worth of financials in order to be considered for a (traditional) loan. You ve also got to have had an Australian Business Number (ABN) for at least two years. You need to provide financials for every entity. That could be a lot of paperwork, especially if you ve got multiple companies and trusts set up. Lenders can annualise tax returns, so if you ve only got financials for six months out of a year, that s OK. You ve typically got to have at least two years worth of financials in order to be considered for a (traditional) loan. What you earn out of a business isn t as simple as it might seem, either. While you might think that the amount you draw out as salary say, $50,000 is your income, that s not what most lenders want to see in terms of your borrowing capacity. They re looking at your overall profit, plus any salary that you ve drawn out of the company. So, if you ve drawn $50,000 out of the business and made $100,000 profit that s 06

4 typically seen as income of $150,000. Most lenders will also take into account depreciation if you re self-employed, adding it back onto your income figure, as long as it relates to the tools of the business. However, be warned car depreciation is a common exclusion. Interest on borrowing for other properties can be added back (minus rent), as can one-off expenses such as bad debts. Sounds good in terms of borrowing capacity, doesn t it? Well, as usual it s nowhere near as easy as it seems. Lenders typically average the income across the two-year period, as long as the most recent year is higher. Lenders are also concerned about consistency of income: if there s a variance of more than 20% across the two years financials, that rings alarm bells. For some lenders, it s an automatic no; some will just take the lower figure; others will take the lower figure and add 20%. Obviously, this can be a major constraint to self-employed borrowers, especially in the first few years of a business or in volatile economic conditions, where income streams can vary. The two-year ABN requirement is non-negotiable. So, if you re looking to turn self-employed in the near future, it may be worth applying for an ABN sooner rather than later, so that you ve got added flexibility. if there s a variance of more than 20% across the two years financials, that rings alarm bells. The simplest solution if you re planning on going into business for yourself is to get your finances sorted before going out on your own. 04

5 Recently Changed Jobs You ve finally snagged that dream job paying you megabucks time to put that new found wealth to good use by taking on another investment, right? That s not necessarily how your lender will see it. The Inside Track New jobs are exciting but lenders are more concerned about whether you re going to stick it out beyond the honeymoon period. Probation, probation, probation is the keyword here Probation, probation, probation is the keyword here: many lenders won t lend until you re outside of your probationary period in a new role. This can be three or six months and in some cases, as much as 12 months. If you re in a job which involves moving employers regularly, such as teaching, this can cause problems. There are a few exceptions: in some circumstances lenders will waive the probationary requirement if you re moving to a new role within the same industry and they usually prefer to see two years experience in the same role and/or industry. 06

6 Awkward Income Situations Life s easy if you draw a stable monthly or weekly paycheque: however, that s not the case for everyone. Bonuses, commissions and overtime are all a fact of life in the modern business environment; part-time workers (especially those with multiple roles) and casual work all add extra complications when it comes to assessing borrowing capacity. How can you make sure lenders take into account every cent? The key to any tricky income situation... is to prove consistency of income over time The Inside Track The key to any tricky income situation, regardless of which umbrella it comes under, is to prove consistency of income over time and declare every scrap of income that comes in. Provide as many payslips, tax returns and/or bank statements as possible to show that income is regular and consistent. Saying that, there are some tricky policies relating to specific situations that can crop up: Casual Workers: If you re a casual worker, many lenders will only lend if you ve been in said role for over a year. However, this can be negotiable as long as you can prove consistent income. 06

7 Commission-Based Pay: Most lenders will accept 100% of commission payments, as long as it s consistently paid over a period of several months. Bonuses: Lenders policies vary on bonuses: some will only count 50% of bonuses, others will count 100%. Overtime: Again, lender policies differ some will only count 50% of overtime income, others 100%. This is also industry-specific: for example, jobs where income often relies on overtime or work out of regular hours such as nursing or emergency services may find that banks automatically take into account 100% of income. However, lenders may require that this is a condition of employment, evidenced by a letter from the employer. Part-Time Incomes: Having one job is easy: all lenders will take 100% of the income of the job you declare first. It is subsequent jobs where the treatment varies: some take 100%, some take 80% and some take 50%. While most of the big four lenders will count 100% of part-time income towards your borrowing capacity, it s always a good idea to list the highest-paying job first. Having one job is easy...it is subsequent jobs where the treatment varies Rental/Dividend Income: All lenders take rental income into account; how much varies from lender to lender. Seventy-five to eighty per cent is standard. Where shares are concerned, a number of lenders will not take into account capital gain (this is also the case with property). Typically, you need to show two years history of dividends in your tax return. 04

8 Credit Defaults The bete noire of loan applications, every prospective investor dreads hearing the question what s this credit default on your file? How can you make sure that the door isn t slammed in your face at the first sign of a missed payment? The Inside Track The first question is what kind of defaults you re talking about. If you ve got one default that s a few years old for less than $1,000, and you ve got a sizeable deposit, then you may be able to convince a mainstream lender to overlook it. The key is being upfront and disclosing what, when, where and why the default happened The key is being upfront and disclosing what, when, where and why the default happened as well as making sure it s paid off. So how do you clean up your credit file? Knowing if you ve got a default is the first line of defence. Order your credit report from mycreditfile.com.au (cost $41.95) and check for any defaults. Pay any outstanding defaults they remain on your file for five years. Then, prepare to be contrite. Lenders also frown upon bank defaults; if you ve got a default with one bank, you re very unlikely to get a mortgage from that bank. 06

9 Awkward Residency Situations Recently moved to Australia? Australian national living and working overseas? Building a property portfolio can be trickier than for your average Joe. What are your options? The Inside Track Out of all the various awkward residency situation, Australian expats have it easiest. Most of lenders will lend to Aussies overseas, as long as you re buying property in Australia; you won t get funding for a property overseas. Most will lend to 80% of the property value. Building a property portfolio can be trickier than for your average Joe. Some lenders will also provide loans for foreign nationals living overseas who are looking to buy in Australia. However, any foreign national will need to obtain approval from the Foreign Investment Review Board before purchasing, and are typically restricted to only being able to buy a home or new property. It s foreign nationals residing in Australia which is trickier. If you re a permanent resident, there s usually no problem: you ll be considered under a lender s standard policies in the 06

10 same way an Australian citizen is. However, if you re a temporary resident say, for example, you re being sponsored to be in the country by an employer then you may have issues getting a lender to even consider you. Of those that will, few will lend more than 70% of the value of a property. And, on top of this, you ll also have to qualify for FIRB approval to buy a property as per foreign nationals overseas. Even so, there s good news for residents who ve moved to Australia for love. If you re buying a property with an Australian national, there are no restrictions: you can be a co-applicant on the loan without a problem. So, joint ventures and buying with a partner are both distinct possibilities for the temporary resident looking to invest in Australian property. there s good news for residents who ve moved to Australia for love 04

11 High LVR Situations You know that you re going to be taking out a loan for more than 80% of the property price, for whatever reason. How can you get the best deal on loans that involve lenders mortgage insurance (LMI)? The Inside Track First of all, while loan sizes are creeping back up again, the days of 100% loans are long gone. while loan sizes are creeping back up again, the days of 100% loans are long gone. Ninety-seven per cent loans are available: however, these are almost universally 95% loans with the cost of the Lenders Mortgage Insurance added onto the loan (technically known as capitalisation). So, regardless of what size loan you re getting, you ll need a deposit of at least 5% in cash, equity or shares. This will also need to be considered genuine savings so will need to have been in your account for at least three months. However, it s also clear that not all LMI is created equal. Depending on the size of the loan, the LVR, the underlying LMI provider (one of either Genworth or QBE), the cost can vary wildly. 06

12 If you already own investment properties, it may be worth applying for a loan with a lender that uses Genworth, rather than QBE, as Genworth is more forgiving when it comes to existing debt especially if it s negatively geared. Bear in mind if you make more than one application that, if you go to two lenders who use the same insurer, you ll more than likely get the same outcome. Genworth is more forgiving when it comes to existing debt 04

13 Self-Managed Super Funds Buying a property through a self-managed super fund is an increasingly popular option: it s seen as a simple, tax-effective and elegant solution to taking control of your retirement income. However, the process of financing a property purchase is anything but simple and elegant. What should you bear in mind when approaching a lender for a mortgage? The Inside Track The key to obtaining an Self-Managed Super Funds mortgage is making sure that your self-managed super fund is correctly structured and able to service the loan. a simple, tax-effective and elegant solution to taking control of your retirement income. In terms of structure, you need to ensure that your selfmanaged super fund is compliant for borrowing and that the Self-Managed Super Fund is allowed to invest in property. You ll also need to set up a trust which will directly own the property on behalf of the self-managed super fund. Most lenders now provide a self-managed super fund loan, as do more and more mortgage managers: however, there are often LVR restrictions on loans of around 70%. 06

14 Lenders also assess the serviceability of the self-managed super fund, not the beneficiary: therefore you need enough contributions including rent from the property going into the fund to be able to service the debt. Lenders typically want to see two years evidence of contributions. This can present problems for self-employed borrowers: while PAYG borrowers usually keep up the 9% contributions, this isn t always the case for business owners and just throwing $50,000 into the fund to help with servicing at the time of application won t necessarily help. Another quirk that older lenders should be aware of is that many lenders won t accept contributions to the super fund as income for servicing loans once the beneficiaries are over 60 presumably on the assumption that they ll be starting to draw on these in the relatively near future. Older borrowers, therefore, may need to put in a larger equity stake to ensure than the rent covers the repayments; the benefit to this, however, is that the property may well be cash flow positive and should boost retirement income. Lenders also assess the serviceability of the selfmanaged super fund, not the beneficiary 04

15 Ready To Fast Track Your Home Loan? If you re ready to apply for an obligation free online pre-approval then simply complete the 3 step online application form, select a time that suits you and we ll call you with details of your pre-approval. It s that simple. 05