The 5 Mistakes to Avoid When Getting a Home Loan
There are lots of things to consider when taking out a home loan. But if you’re able to avoid some common mistakes, it can be a fairly smooth process.
According to a 2019 Digital Finance Analytics report, home loan rejections reached a record high of 40%. Many aspiring first-home buyers, in particular, got turned away.
And as you can see in the below chart, the loan acceptance rate is currently near the lowest. The fact that it’s getting hard for first-time buyers to secure the required funds also contributes to it.
Why is this the case? Is getting a home loan really so hard?
It’s certainly not simple. At the same time, you’d be surprised to learn how many rejections were the result of avoidable mistakes.
To help keep you out of the rejection statistics, here are the home loan application mistakes to watch out for.
1. Being Dishonest About Your Income
Your income and expenses play a vital role in loan serviceability. Knowing this, many applicants present a distorted picture of their finances. They may leave out some expenses to make the lender believe that they have more disposable income.
This is a massive mistake that can get you into all kinds of trouble.
First of all, the lender likely has access to more information than you think. They’re going to scrutinise every aspect of your finances.
If they notice any red flags, not getting accepted might be the least of your problems. Since you’ve had to vouch that everything was accurate to your best knowledge, it’d be within the lender’s right to sue you.
Furthermore, altering official documents is against the law. You could end up in court for lying on your application.
Always present all your financial and other data accurately. Like it or not, the lender will probably know the truth anyway.
2. Selecting a Lender or Loan Based on Interest Rates Alone
The interest rate is the biggest expense of a mortgage loan, sometimes exceeding the principal over the term of the loan. It might make sense, in the mind of many, to choose the lender that offers the lowest rate.
But there are many cases when this wouldn’t be a good idea.
For instance, there are other expenses that the lender might not disclose at first. These may include promotional interest rate period, ongoing fees, insurance, early repayment fees, and more. You may also not be aware of these expenses unless you actually go through the fine print. And it’s not uncommon for these to add up.
Besides, there are also non-financial loan features that you should take into account. For example, repayment flexibility can make a big difference in how much you’ll end up paying in total.
The lesson is this, don’t choose a lender or loan based on the interest rate alone. Shop around and compare all the important contract features that can impact your repayment.
3. Failing to Get Pre-Approval
You may not know this, but every time your loan application gets rejected, it can lower your credit score. And if you get rejected several times in a row in a short period of time, lenders will think that something must be up if you’re so desperate to get a loan.
The truth is that you don’t want to apply unless you’re certain that an approval is likely. And the best way to find out is to get pre-approved.
A pre-approval assesses your serviceability, and it will include how much you’re pre-approved to borrow. Armed with a pre-approval letter, you now give off an impression that you’re a serious buyer who’s ready to buy, so agents and vendors are certain to consider your offers seriously.
Know that a pre-approval isn’t the same as pre-qualification – the former is much harder to get
Most of the time, you can get pre-qualified with minimal information, and sometimes just your credit score is enough. Unlike a pre-approval, a pre-qualification doesn’t guarantee that you’re eligible for a loan.
4. Not Checking Your Own Credit History Before Applying
If you don’t know your recent credit score, you’ll want to find out before applying for a loan. This ties back to the previous point. If your score is weak, it’ll get weaker if your application gets rejected.
If that’s the case, you should work on improving your credit score first.
The good news is that improving your credit score is no secret. Many smart people and agencies have figured out the algorithm used by the various credit bureaus. And there are numerous ways to improve your score in the short term.
5. Failing to Structure Genuine Savings Properly
Most people know that they need a 20% deposit to take out a home loan. But did you know that your deposit needs to be ‘genuinely saved’?
This is the term that the lender’s insurer uses to reinforce their policy. They want to make sure that you didn’t just borrow this money without any real ability to pay back the loan.
However, some people failed this test due to honest mistakes. For example, they might have held their savings in a checking account that has lots of transactions. Because of this, the savings might appear volatile and raise a red flag.
Make sure to keep a separate account for your savings and don’t move money in and out of that account all the time. That should be enough to satisfy this criterion.
The Devil Is in the Details
Most people consider a home loan application to be tedious. But if you take your time and get it right the first time, it doesn’t have to be this way.
Now that you’re aware of some of the most prevalent mistakes, you’re already ahead of the curve. Just remember to pay attention and don’t rush anything.
In addition to avoiding mistakes, there are ways to boost your chances of approval. Contact us today to learn more.