Months have gone by and you finally have your deposit……But – it’s not over yet………………we now have to go and get pre-approval for our new loan.
Sometimes Lenders refer to this as an AIP – Approval in Principal. An AIP will go through a few different stages of the loan approval process, including your credit report. This will be a full application approved, subject to a bank valuation on the property that you will choose to make sure it’s within the lender guidelines.
Part of the approval is based on whether or not you have a suitable deposit and funds to complete the loan. Luckily, you have both. Another part of the process is called “serviceability”. This means,, can you make these repayments each month with reasonable ease.
Lenders will take several things into account which a buyer would not necessarily know. The main item they look at is your income. From here, several items are deducted. The first is living expenses. With Living Expense, the lender will increase this monthly deduction with each child that you have.
Another deduction will be repayments on Personal Loans or Car Loans. In an ideal world, it is best to pay these off prior to applying for your loan, unless you are confident the income level you have, will be sufficient to cover both.
Next will be the monthly deductions. These are extremely important and underestimated. These can mean the difference between instant approval or decline. I’m talking about credit cards and store cards.
Let me explain..you might open your wallet and pull out 3-4 credit cards. They might each have a limit of $5000, but you never use them or you might have them available for “emergencies”. However, in a loan situation, a financial institution will take 3% of the LIMIT as the monthly repayment you owe – even if you owe nothing. This is because if you at some stage did max out the cards, this would be the minimum payment on each card. More importantly, than credit cards, is our store card.
Most forgotten item we have and yet, if these are not disclosed to your lender, the loan will be declined. It is very easy to forget our store accounts because they don’t always come with a card, however they still have an approval limit given to you from the retailer. You may only use your store account once every 3-4 years, but you must disclose the limit to your lender. By now, you are probably thinking that getting a loan approved is going to be impossible! Not so. The secret is to assess what you really need to keep. Can you close down some of these cards or reduce the limits as small as possible? Can you close your store account or reduce the limit?
Some people cling to their credit card limits as a safety net or feel that they are “lucky” their bank has generously given them the regular increases, but this all reduces your borrowing power by thousands of dollars and my cause you to miss out on your new home. The good news is, that most lenders will actually provide a free credit card with a fairly decent limit upon approval of your new home loan, so no need to worry.
This stage is extremely important and is why you should always meet with a broker. Brokers are aware that all lenders have different policy when it comes to assessing your serviceability. You might get declined with Bank A, but a broker will know that Bank B or Bank C or D will definitely give you an approval. If you receive a decline from Bank A, this will be recorded on your record and may cause the next Bank to decline you because the first one did, which is not give you a fair playing field.
A good broker would not allow that to happen. A broker will not allow that to happen. They will know to only apply with the bank that is definitely going to match your personal details and give you maximum opportunity for you pre-approval.
Remember, you’ve worked too hard to get this far, for the dream to end now!!
Credit Advisor
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