Common mistakes home loan applicants still make

Unless you are a multi-millionaire and can afford to pay cash for a house in full, getting a home loan is an inevitable part of the home buying process.

For borrowers, especially if it’s their first home, applying for a mortgage can seem like a daunting task. Financing policies can be stringent and vary between lenders, making it confusing for borrowers to present an application that gets approved without any questions being asked.

Given the stricter lending rules, there is little room for any mistakes. One error can lead to the lender asking endless questions and you missing the contract finance approval date, causing stress and potential financial penalty. 

Here are some of the common mistake’s applicants still make today when applying for a home loan:

Overstating income and understating expenses

Lenders use these two factors to gauge your capability to service the amount you want to borrow and one of biggest mistakes an applicant can commit when applying for a home loan is not declaring their correct household income and expenses.

Overstating your income will get you nowhere — lenders will either want to see your payslips or digitally verify your income by requesting access to your internet banking.

Banks and lenders have ways to detect red flags in your application. For instance, lenders may cross check your stated income by averaging the ‘year to date’ figure on your payslip!

It won’t help your cause if you don’t fully declare your expenses either — some applicants are tempted to cover up expenses such as childcare costs, credit cards, and other personal debts. Even if you do not declare these expenses, your lender will be able to see what active liabilities you have through your credit file.

Lenders share data among themselves, mortgage insurers, and other institutions to prevent fraud. In short, if you get black listed by one lender for potential fraud, others will know.  

Sticking with ‘your’ bank

The first stop for most borrowers when needing a home loan is their regular bank, and why not, it’s the devil you know.

However, according to the Federal Productivity Commission on Banking, this is one mistake that could end up costing the borrower in excess of $105,000 over the life of their mortgage!

Borrowers often obsess over interest rates, thinking these are the only indicators of how good a home-loan deal is instead at looking at the value over the life of the loan.

While interest rate is an important part to consider, it does not really tell you everything there is to say about the mortgage product you want to apply for. There are other considerations, for example, do you qualify for lenders mortgage insurance (LMI) premium waiver when borrowing greater than 80 percent of property value.

With over 40 lenders on loansHub platform, I can tell you that there are many fully regulated lenders, many of whom you most likely never heard of, offering far better rates than one of the big 4 will ever give you.

Check how your home loan compares

Multiple applications

With lenders subscribing to comprehensive credit reporting, when you apply with different lenders, they will know you have submitted applications to other financial institutions. They may want proof that you haven’t been declined by other lenders or request a statement stating that you will not proceed with another lender if approved.

While shopping around is important part of finding a home loan with the greatest value, mistakenly applying with multiple lenders to increase your chance of getting the best interest rate will end up having a negative impact on your credit score.

Not declaring upcoming life changes

Life events can drastically impact your mortgage application. Changing employment status from employee to self-employed is one such event, another and one which can have significant financial impact is having a child.

Lenders usually require their borrowers to have steady employment to ensure a constant source of income. If you switch employment status, unless the workforce in your industry is highly transient, your chances of getting a home loan will decrease as lenders want to have confidence in your ability to operate as a profitable business for a number of years.

Having a child is a personal choice and yes, a lender cannot dictate when you should or shouldn’t grow your family. Though the choice to have a child is the borrowers, declaring on your home loan application that you’re expecting a child or planning one is not.

Introducing a child potentially means that family income will decrease and expenses increase with the new addition. In the lenders view, this will have a direct and negative impact on your capacity to service the debt as such it must declared as a foreseeable significant change.

Taking new debt

Making large purchases before applying for a mortgage is also a no-no. You do not want to borrow for a new car leading up to your home-loan application, unless of course you know that your income level allows you to afford both comfortably.

Additional debt has a negative impact on your overall debt-to-income ratio, which is one of the most critical considerations lenders use to assess your creditworthiness. The higher your debt-to-income ratio is, the lower the chances of you getting approved or getting home loan at a small LVR. A bummer if you don’t have 20% deposit saved up.

Depositing large amounts before application

If you think it’s a wise move to deposit in bulk before applying for a home loan in the hopes of showing your lenders that you have significant savings, think again.

Depending on the property values to loan amount ratio, lenders may require the borrower to show that they have some genuine saving to contribute towards the purchase. Typically, lenders want evidence that at least 5% of your deposit was saved over 3-month period to class it as genuine.

As long as the source of funds is verifiable by the lender, it’s not like to have a negative impact on your application, what does happen however is the assessment of your loan gets delayed as the lender will seek evidence from you to confirm ownership of funds.

Tell us: Enjoyed this article? Don’t forget to like and share.

And while you’re here, take our mortgage shredder challenge and discover how much you can save on your home and investment loans by using loansHub technology as your personal mortgage manager. To discover why loansHub and what we do, click here.

This article does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.