Ten factors that could derail your loan application

By Ericka Pingol

Securing finance to purchase a property can be difficult, which is why it is essential to make sure your application is error-free. Below is a list of guidelines that you may follow:

  1. Be honest about your financial position. One common reason that mortgage applications get declined is missed bill payments. A potential borrower's credit history is closely scrutinised by their chosen lender.

Consider getting a credit report before hopping into the property market. This way you could better analyse your financial situation and make some adjustments if your position isn’t the most ideal.

To get a credit report, you may contact national credit bureaus such as Equifax and TransUnion.

  1. Make sure you declare all your expenses. Forgetting to mention something like an emergency credit card is also a common problem and one that can derail an application.

Sample checklist of expenses:

Monthly Expenses Checklist

Expense

Estimated Cost

Rent

$1,200

Utilities and heat costs

$500

Credit card

$200

Food allowance

$500

Misc.

$200

By listing all expenses, you may also get to evaluate where repayments would fit in after all living expenses have been accounted for.

  1. Employment woes. Lenders like borrowers who have a relatively stable employment record – at least six to twelve months or more in your job, receiving regular income.

Ask yourself some questions regarding your job status: Will you be in your current job for the next two years? Is your job status stable? Is there any risk of you losing your employment?

These may help you reflect on your employment and see whether it’s a good idea to get a mortgage right now with the job status you have. If not, consider delaying your application and re-applying once you get a better and more stable employment status.

  1. Paperwork snafus. It's a simple thing – but an important one. The paperwork that lenders require can be significant, and it is important to get it right: sending in your home loan application without the documentation required may result in the loan application going back and forth to the lender several times without result.

Create a checklist including all the paperwork you need to submit for your application to avoid any snafu.

  •   Home Loan Document Requirement
  •   Identification
  •   Tax returns
  •   Pay stubs, W-2s or other proof of income
  •   Bank statements
  •   Proof of assets
  •   Credit history
  •   Gift letters
  •   Renting history

A mortgage broker handling paperwork may also be the quickest and simplest way to ensure you get it right. However, if you're going it alone, be sure to read the lender's instructions very carefully several times. Remember, if you're putting in a joint application, you'll need to provide evidence for each applicant.

Need help with the paperwork? Speak with a mortgage broker near you.

  1. Knowing your limits. It’s all too easy to get caught up in enthusiastically hunting for a property without knowing exactly how much you can afford. However, it could be disappointing when you find out you can’t exactly purchase the house you like.

Before going house hunting and filing a loan application, figure out your mortgage affordability. Use our Mortgage Affordability calculator to have a rough estimate of how much you can afford.

  1. Not knowing lending criteria. Lenders and the mortgage insurers behind them work to a wide range of criteria when deciding whether to approve a home loan.

Do your best to make sure you know what rules you must work by before heading out on the hunt – otherwise you could find extra conditions on your loan or your application denied altogether. The simplest way to do this is to seek out a home loan pre-approval before looking for a property.

A pre-approval is the process of determining whether a borrower meets a lender’s guidelines for a home loan. It may give you some confidence that you are a qualified borrower in the eyes of a lender.

  1. Not shopping around. Simply not considering all your options in the first place could derail your application. Different lenders offer vastly different loan amounts: Lender A may lend you $330,000; while Lender B offers $370,000 and Lender C may not approve your home loan at all.

Therefore, it's important to be proactive once you've done your figures and know what you can honestly afford: don't limit your search to just one or two lenders. Creating a comparison sheet may help you compare loan features that each lender offers.

Sample comparison sheet:

Comparing Home Loan

Lender

Interest rate for a fixed term

Loan features

A

 

 

B

 

 

C

 

 

D

 

 

This may also help you see what deals you are missing or rule out features that may not fit with your financial situation.

  1. Not getting the right loan structure. Just because the first lender you talked to have the cheapest interest rate, doesn’t mean they are the best for you. Especially if the lender’s policy doesn’t fit your financial position.

Map out your desired loan structure and features first before you shop around for lenders. This may save you thousands of dollars, as you have the right structure catering for your current and future needs.

  1. Dinky down payment. Most lenders require a home loan application to have a genuine deposit of at least 5% of the purchase price. Sometimes, even more.

How much you need for a down payment depends on the purchase price of the house:

  • Purchase price less than $500,000, the minimum down payment is 5%
  • Purchase price between $500,000 and $999,999, the minimum down payment is 5% of the first $500,000, and 10% of any amount over $500,000
  • Purchase price is $1,000,000 or more, the minimum down payment is 20%

Do your homework. Educate yourself about the market before you start looking for a property and get a handle on how much you really need before committing to a purchase – and then add a buffer of at least 5% on top.

  1. Purchase cost pain. There are a wide range of purchase costs in addition to your deposit, including (but not restricted to): CMHC insurance, property tax, legal costs, application fees, solicitor fees and inspection fees.

It might be a good idea to speak to friends, family, mortgage brokers or real estate agents, as they can help advise you about the costs you need to pay – and those that you don't. They'll also be able to give you an insight into ongoing costs.

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