Whether you are applying for a job, a spot on The Bachelor or even an investment loan, you want your application to be perfect. It means doing the necessary homework and preparation to ensure you are an ideal candidate. But when it comes to impressing your financial lender, it will take more than a new dress (or tux) and a rose to get the stamp of approval.
To help you buy an investment property sooner, here is what the bank will be looking for in your loan application:
Before you are approved, it is essential to assess how much you can afford to pay back. Lenders will look at your annual income, monthly expenses, current interest rates, loan terms, and the type of loan you are applying for with the lender. They will also look at existing debts and financial commitments, such as credit cards and lease agreements (e.g. car and mobile). The mortgage broker can help you estimate your total purchase power.
The type of property
The bank will not approve all properties – even if you think it is ‘the one’. Lenders are looking for low-risk investments, so the investment property must:
- Be a standard house, unit or townhouse, or land and construction.
- Be greater than 50m2 living area (some cases may be an exception as low as 40m2 but need to check with the lender)
- Be in good condition.
- Be in a high-demand place with a population of 10,000 people or more.
So, if you are thinking about turning that little beach shack into your retirement fund, you may want to reconsider the property.
Loan to value ratio (LVR)
The loan-to-value ratio is the percentage of a property’s purchase price/value obtained from a property valuation that a lender will let you borrow.
Applications with a lower LVR are more attractive to the bank and are more likely to be approved. For example, if you buy a property for $400,000 and need a loan amount of $300,000, the LVR will be 75%.
If you borrow more than 80% LVR, you may also need to pay Lender’s Mortgage Insurance (LMI) – it is a one-off cost that it can add to your loan to protect the lender if you are unable to repay your loan.
To help you save enough for a deposit, open a dedicated savings account. For example, online savings account with your current bank has no account-keeping fees and a variable base rate to help you get your loan approved sooner.
Your credit history
Remember that old phone bill you never paid? Or that overdue credit card statement that was hiding in the kitchen drawer? It could hinder your application.
Unfortunately, unpaid bills or records of late payments could put a black mark against your name. So, if you currently have a few outstanding accounts, either pay them ASAP or contact the credit provider immediately to discuss a payment arrangement. Some lenders will accept certain defaults and still consider your application. It is worth speaking to your mortgage broker to discuss the best-suited lender for your circumstances.
If you have been going through jobs like speed dates, lenders could see you as high-risk ¬– they want applicants who have been with the same employer for a minimum of two years and can prove they are financially stable. Nevertheless, if you have switched jobs in the past but remained in the same industry, this should be acceptable with some lenders as well. For instance, IT workers may have short fixed contracts as a norm of the current employment contracts of the IT industry.
Banks are also less likely to lend money to those who have just started a new job and are in a probationary period. So if you are planning on purchasing an investment property, it is better to apply for a loan before switching careers.
Just like giving someone a rose, the financial lender must be aware of your intentions – leading them on for the wrong reasons could land you in big trouble.
Because investment loans usually attract a higher rate, you might tempt to take out an owner-occupier mortgage (despite you never living there). If your purpose is intentionally misguided, this is called occupancy fraud, and it comes with some pretty significant penalties (AKA, do not do it).
Instead, let a mortgage broker help you find a low-rate loan to suit your financial situation.
Applying for an investment loan and getting it approved does not need to cause you heartbreak. However, getting all your ducks in a row before applying for a loan can help you buy the right property sooner.
To discuss your home loan needs, contact ASA Mortgage Brokers today to book your FREE consultation appointment.
The information is a compilation from various sources for your benefit and should not be relied upon instead of appropriate professional advice. This article is prepared based on general information. It does not consider individual financial objectives or needs and is not financial product advice, and the content is quoted from the Yellow Brick Road Blog.