When applying for a loan it can be a painful and time consuming process but there is a simple way to go about it. The first thing to do is try to be finance ready and make sure bills are paid on time to avoid surprises on the applicant’s credit file. Reduce your credit card limits if possible as this will increase borrowing capacity. Be prepared and have all necessary documents ready.
These often include; two forms of ID, six months mortgage statements for a refinance or loan increase, or if a purchase, the purchase contract will be required. Evidence of ‘funds to complete’ if a purchase, a clear understanding of assets and liabilities to avoid leaving any off and being accused of non-disclosure, and an exit strategy if you are over 55.
It is always wiser to never be a guarantor for anyone; it is incredibly risky. Never purchase a property with someone else except a spouse, lenders can attribute 100% of the debt and only a % of rental income, inline with what each person on title is responsible for/entitled to.`
never be a guarantor for anyone
The fundamental elements of what a lender assesses when deciding on every application and every applicant are what is called the The Five Cs of Lending:
- Collateral (Property — what the valuation says, zoning, density, postcode)
- Conditions (Policy)
- Capacity (Servicing)
Lenders want to see a track record of repayments on debts to demonstrate the applicant has been responsible. It’s indeterminable whether a person has the inclination to repay the debt if they have no debts. Deals, where someone has 5% of genuine savings are good, because they have proven they can save money. Borrowers with no ‘hurt money’ in the deal are higher risk.
5% of genuine savings is GREAT!
Having assets is another strength in a deal when applying for a mortgage. Whether it’s cars, furniture, other belongings that have a value attributed to them and naturally; property, shares, superannuation, and cash, they all count to paint a picture. The older the applicant is, the more assets the lenders would like to see. They don’t like it when they see a sixty-year-old person renting with friends, with no assets.
If bills or repayments are not paid on time is considered a blemish on someone’s character potentially. Avoid shopping around for the best rate, nor apply for short-term loans, or more than two to three credit cards/personal loans, and if these people have too many enquiries on their CRAA (credit report) they have a greater likelihood of failing credit scoring.
Policy governs how a deal is assessed. This is the more tangible method of assessing a loan and its credit worthiness. This is less about the borrower and more about the purpose of the loan, type of loan, loan amount, etc. There are parameters for lending based on location, debt against equity, loan amount, and purpose.
you must be able to service the debt
What a person earns in their job or small business, and tenure in the role have an impact. A person must be able to service the debt they require, in conjunction with any other debts they already have. This is another reason why a broker can be worth considering. A good broker or expert at your bank is one who knows which calculators are better, and which lenders are more forgiving.
Ultimately there are three things, which can assist, in a greater likelihood of finance being approved. A good credit rating, cash or equity available and enough income to service current commitments as well as the new loan being applied for.
Changes ahead for small business loans?
NEWS FLASH!: ASBFEO Kate Carnell has said the ABA’s decision not to accept the ASBFEO’s definition of a small business loan as any loan under $5million is disappointing.
Ms Carnell said: “The ABA’s very restrictive definition would mean that any business with more than 20 employees would not be deemed a small business under the banking code of practice.
“Equally restrictive and unworkable is their approach to their $3million loan limit. The ABA is saying that any business that has aggregate loans above $3million, including loans with ALL financial institutions and including ALL associated entities, will not be treated as a small business.
“This would mean that all loans taken out by directors of the business and their partners would be aggregated to determine if a loan taken out by the small business would be able to access the removal of non-financial default clauses and the other recommendations of the ASBFEO Report.”
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