Knowledge is power, so it pays for agents to have a good understanding of the mortgage process. And I mean ‘pays’ literally, because it is crucial that loans are approved and settle for you to get the sale and your commission.
Most agents know the main reasons banks reject buyers – their deposit is too small, their income is too low, they’re not good at saving or they have too many outstanding debts.
However, there are also some less obvious reasons.
Let me share five surprising reasons lenders decline home loan applications and how agents can help buyers solve those problems.
1. Lender policy
Lenders can often change their lending criteria, and just because a loan structure was acceptable last time someone bought a property or even when they were pre-approved some time ago, it doesn’t mean it will be now. If policy changes, what was acceptable then may not be now. Requirements to have a larger deposit, a lower loan-to-valuation ratio, be less willing to fund interest-only loans or investment loans can be introduced at any time.
Solution: Without prying too much, see how knowledgeable they are about the requirements of their lender. If they seem a bit vague or it is obvious that it has been some time since they spoke to their lender, you may suggest another visit might be warranted.
2. Adverse listings on their credit file
Lenders rely heavily on what is recorded in people’s credit files. This can include anything from a default listed by a utility company for a house they have lived in before, late payments of power bills and personal loans, just applying for lots of credit cards or loans within a short amount of time to filing for bankruptcy years ago.
Some of these things borrowers won’t be aware of until they apply for credit and when this happens it can be too late and they are declined. Because of the number of entities who can list things on a person’s credit file, there can also be mistakes. Getting these fixed can take a bit of time and effort which is scarce when you are negotiating on a home purchase.
Solution: Unfortunately, there’s no quick fix. All you can do is see if they are aware of anything adverse on their credit file and if they have a copy of the credit file themselves.
The main thing to realise is that it isn’t an automatic ‘no’ to every lender. There are specialised lenders out there who can assist even if the person has credit concerns. If the borrower doesn’t know what to do, it pays to have someone on speed dial who you can refer them to quickly, who you know has specialised knowledge in this area. It may be the difference between a quick sale and having to start all over again with a new buyer.
3. Previous conduct at that lender
Imagine a buyer has a track record at a certain lender of overdrawing their savings account and falling behind on their personal loan repayments. Imagine that same buyer asking this lender for a $500,000 mortgage. It would be easy to understand why the lender might say no.
As obvious as this sounds, lenders can rely more heavily on their own history with a borrower than even what is listed on their credit report. I have known borrowers who did silly stuff in their early years who have now gone on to be more responsible, be knocked back for a loan due to what happened back then.
Solution: Ask the buyer what lender they are looking to go with and if they have had any prior dealings with them. Sometimes, this is a reason in itself for people to be complacent and not get a proper pre-approval.
If it is an institution that they have always been with, all the more reason to ensure they are properly pre-approved. If they run into trouble with their own lender, other lenders may not have the same issues, so encourage them not to just give up and even offer your own mortgage contact for them to try. Having someone who can act quickly is key to your sale and key to keeping the buyer hot.
4. Self-employed handicap
Banks prefer borrowers who have steady, consistent income over income that varies wildly from year to year. They will also have a minimum period of time that they will want them to be self-employed for and be up-to-date with their financials. Due to the additional requirements for self-employed borrowers, it can make it harder for them to get finance approved.
Solution: Ask borrowers about what they do and if they are self-employed, how long have they been doing it and how business is faring. If they talk about how good this year has been relative to last year or if they have just started a new business, it could indicate they may run into issues with finance.
It is a good sign if the accountant and the lender are working closely together and they have already jumped the finance hurdle. If not, subtly suggest to them that they may want to lock in their finance first or refer them to someone you know who can help with loans for the self-employed who may not have full financials.
5. Wrong property
Valuers are sent to properties to not only check out that the purchase price represents fair value, but also to spot anything that may indicate that the property might be a risky security. Why? Because if the buyer defaults on the mortgage and the bank has to sell their home, they need to be able to sell the property quickly and easily.
There are some properties that lenders can put in the ‘too hard basket’ or have rules around what they will and will not accept. These could include small studio apartments, certain zonings, certain postcodes, some high-rise apartment developments, incomplete renovations, properties in bad repair or even overhead high voltage power line towers near the property.
All of these could mean that a loan that is ‘approved subject to valuation’ could fall over because of an ‘unsuitable’ security.
Solution: Build your understanding of what lenders like and what they are not so keen on. You can do this by developing a relationship with a broker or lender, and as you market properties with unique aspects, you could get their advice from a lending perspective.
If you know ahead of time that borrowers might run into issues, you can have that conversation with them upfront and get them to check with their lender first. It is no use putting in an offer to the vendor from a borrower with a 5 per cent deposit, only to find out that the lender insists on a 10 per cent deposit due to the type of property.
As a mortgage specialist, I have always worked in partnership with the other parties involved in the transaction. We are all in it to reach the same outcome and give the customer a really good experience in the process. Being able to spot issues before they become apparent and knowing where to turn to get things back on track quickly is key to the whole process.