And what to do about it
You’ve spent all this time applying for a mortgage only to have your application denied. There are several reasons why things may not have worked in your favour, and the good news is, there are things you can do to fix it.
While it’s better not to have your application denied at all, it’s not the end of the road. We’ve pulled together the four most common reasons why banks and lenders turn down applications, and what to do about them.
Finding and speaking to a mortgage broker you trust can help you better understand how to go about applying for – and securing – a mortgage.
You don’t have a big enough deposit
Saving a 20% deposit in today’s market can feel like you’re paddling upstream – without the paddle. In Auckland, the median house price reached a whooping $870,000 in December 2017 according to REINZ.
Having a deposit of 20% or more of the purchase price does make it easier to get a mortgage, and it helps you avoid paying the cost of Lender’s Mortgage Insurance (LMI), which all things being equal, means a cheaper mortgage.
You’re best to continue saving and/or looking for a cheaper property (so you need a lower deposit), but even if that’s possible, you still have options.
Recently the Reserve Bank announced changes to lending restrictions on banks: they can now lend more money to first-home buyers with lower deposits. To be exact, 15% of a bank’s total loans is now reserved for low deposit lending (keeping in mind each bank has their own lending policy).
This is where having a Float mortgage broker is super useful. We can steer you in the right direction of which lenders to approach and help you present your case in the best light.
You don’t earn enough income
Interest rates change, and the housing market in NZ is uncertain at the moment. Do you lock in five-year fixed term, or go for a floating rate? A mortgage broker has one job: to find you the best deal. Brokers know who offers what deals right now, and can predict interest rate changes, OCR increases and what the housing market is going to do.
When applying for a mortgage, you need to have a good income to debt ratio i.e. how much you earn compared to how much you pay in expenses each month.
Under the Responsible Lending Code lenders also have to make sure home buyers have enough income to meet their everyday living expenses as well as mortgage repayments. Typically, if your expenses are over 40% of your income, your application will be denied because it’s likely you won’t be able to meet your mortgage repayments if interest rates rise.
You’ve got three options:
- Look for a more affordable property so your mortgage repayments are lower
- Get rid of all short-term debt (RIP credit cards) before applying for a mortgage
- Find ways to increase your income
Our mortgage brokers will be able to tell you which lenders are more likely to loan to you and can also review your application to make sure you’ve covered everything in the right way, particularly when it comes to presenting your income information.
You’ve got a not-so-good credit history
If a broker suggests moving banks, double check how much money they’re due to make from the shift – usually it’s between $4-$5,000 – because it’s a pretty good sign they’re chasing commission rather than the right deal for you. Whereas to re-fix your mortgage with your current bank, the commission for a broker is $150.
Not all hope is lost if you have a bad credit history. A credit history or credit rating is a complete record of your financial history, including things like hire purchases, credit cards and personal loan applications – approved or declined. It also includes late or missed payments, and money still owing.
The thing to know about banks is they change their lending policies often. So, while your bank may have turned you down, others might not.
A good mortgage broker should have a relationship with all major banks in New Zealand so they’ll know who is best to approach. They can also support you through the application process by explaining any black marks on your record. If your credit history is bad… really bad, there are other options like non-bank lenders who might loan you at a slightly higher interest rate.
If you don’t know what your credit history is, it’s worth doing an online check.
You lack proof of income
Another good sign a mortgage broker is advising you based on what’s right for you is how transparent they are with how much commission they’re entitled too from each lender.
This usually applies to those who are self-employed, work as contractors or work part-time.
Banks want to lend to you, but they do need to know their money is in safe hands. Proof of income is required to calculate your income to debt ratio, and that can be tricky if you have irregular income, or if you haven’t been in business for long.
If providing proof of your income is a challenge, a mortgage broker will be your best friend. They understand what banks are looking for and can help tailor your application, accentuating the positive and explaining anything that could be seen as negative.
Again, a non-bank lender may be an option as well and can be surprisingly affordable.
Let’s get you home
At Float, we have a great team of mortgage brokers and advisers who will work with you to find the best lending option. We understand everyone has a different financial situation, and that’s ok – no judgement!
Give us a call today to chat about where you’re at on your home loan journey and how we can help you get the stamp of approval.