No one can deny it. The world of lenders is an animal different from what it was five or ten years ago.
The introduction of the National Consumer Credit Policy has forced banks, lenders and brokers to comply with responsible lending obligations. The result has been a much more careful examination of how banks lend their money. If you combine this with the current Royal Bank Inquiry Commission and the Australian Prudential Regulation Authority's interventions, we are now witnessing a closer look at the loans than ever before.
This eagle eye on the lending industry has led banks to say no to a growing rate, reports estimating that more than 3.5 million loan applications are denied each year. And this number is increasing.
People who are rejected are certainly not the only ones. But being rejected does not mean you have to give up.
Thus, even though we will soon arrive at the possible solutions, the best starting point is always to know why. If your loan application has been refused or you are concerned that it will be, it is essential that we fundraise and understand why the banks have refused. To do this, it is important that you understand the "5 C's" in the way banks evaluate you. So why did the bank refuse your loan?
All banks and lenders have evaluation criteria to determine if a borrower will be trustworthy: if they lend you their money, can they rely on you to repay it? In terms of loan, it is the "5 C of the loan". What is essential here is that every time a bank refuses a request, it will have a reason, and this reason will be linked to one or more of the 5 C.
The 5C of borrowing money
The first is a character.
According to the banks, character consists of evaluating the characteristics and traits of your situation and your history. Banks above all want you to be a safe and reliable borrower. They will want to know: Are you stable in your work? Do you have a good work history? How did your credit history evolve over time? In the end, because the loan is long-term, a person who has already held five jobs in five years can be assessed differently than someone who has been in the same position for five years. Everything depends on your stability.
The second is that of guarantees.
Sureties primarily concern asset security, which means that banks protect their interests by guaranteeing their loans against a property Source: Propertyology, August 2018 or land. To do this, they evaluate the asset underlying the loan. The thing to remember here is that not all properties are created equal. Thus, if your loans are secured by student housing, for example, banks may be less inclined to lend against this type of collateral compared to standard standard housing because it represents a greater devaluation of risk. It is essential that borrowers take this into account when applying for financing, but also when buying the next investment property.
Capacity is at the heart of why most people are denied a loan. This is the ability to repay the loan
The third is Capacity.
Capacity is at the heart of why most people are denied a loan. This is the ability to repay the loan. This is the loan service, that is, the borrower's ability to repay the debt based on the service calculator that the lender could use. Each lender has a different service calculator, which is why in some cases there are situations in which one lender can say no, but another says yes. The biggest advantage with regards to your ability is that you should have smart money with your income and expense history and trap your surplus.
The fourth is Conditions.
This concerns the type of existing credit policy conditions. The loan criteria vary from one lender to another, which means that your application is valued differently, depending on the credit policy of the lender. For example, some forms of income may be accepted, but not others. In addition, banks may have conditions relating to the duration of employment, the types of assets they are willing to protect, and so on. This is why it is in the interest of the borrower to know that the terms of the credit policy play a role in the overall result; or to appeal to an investment-informed mortgage broker who knows what lender is doing what.
Finally, the fifth C of the loan is common sense.
With the tightening of lending policy, we can say that we are seeing less and less the perception of lenders. But banks use – or at least should – a common-sense approach to assessing demand. So, if you can limit the areas that may not fall under any condition of the loan's evaluation criteria, and that this is justified by a valid reason, the banks will likely show judgment in their Evaluation.
Three main reasons why banks refuse
When you master the 5 Cs, you can begin to see the criteria take shape – what the lender is evaluating you. But the top three reasons banks will say no to a borrower are income, current liabilities and guarantees.
1. Income
Each lender has a different risk appetite for narrating his income. What this translates is not simply Do you have enough income to repay the loan? but do you rather have a sufficient income that the bank recognizes as income to serve the loan?
That said, for a lender, the fact that not all income is deemed reliable. Depending on which lender you choose, this may or may not include variable income, such as bonus income or commission income. This is also the case when it comes to assessing the contractual or independent income.
The solution here is to closely monitor the source of all your income and how often and how reliably banks want to lend you money.
To help you, we have created a seven-step money management system – Money SMARTS – which, once implemented, will simplify and simplify the task.
2. Current Commitments
Your current expenses and your exposure to existing debt are also critical. Banks will have a microscope of your expense history to know all of your living expenses and your spending habits in order to assess your service needs.
Do not forget that the world has changed. Banks take a very detailed look at where your money is going and how much cash you have left to borrow more, while having something in reserve.
3. Warranty
Basically, if the bank is not comfortable with the asset that underlies your loan – security – it will not work favorably for your application. The reason is simple: if something went wrong, the bank should know if it could sell the property to get its money.
Ask yourself, "If something goes wrong and the bank has to sell your securitized property to recover its funds (and its costs), would it be able to do it quickly, easily, and cheaply? risk?
What can you do when your loan is declined?
There are seven things you can do when the bank refuses your loan application or to avoid being denied in the first place.
Take the tour
This is not because a bank says no that all the other banks will do it. This is also true for non-bank lenders – commonly referred to as junior lenders – as these lenders often have an appetite for lending money, even when big banks say no. They usually distribute their loan offer through a mortgage broker, so ask a broker to do the shopping for you.
Review existing debts
Close or consolidate your debts to reduce your monthly expenses – this will result in a larger monthly surplus. This larger surplus should be correlated with the possibility of borrowing more money and potentially turning this no into a yes.
Classic examples are credit card debts and short-term personal loans, such as car loans with very high monthly repayments. By consolidating these payments into a longer-term mortgage, you can reduce them significantly and potentially improve your borrowing capacity.
If your loan application has been refused … it is essential to dissect the funds and get to the bottom of why the banks refused
Check Your Expenses
We briefly discussed the spending lever earlier. An unparalleled fund management system breaks down your expenses into essential and discretionary expenses, allowing you to make substantial savings. This is particularly evident with respect to your discretionary spending.
Take an exam several months (six months, better) before submitting your application. If you then reduce your expenses significantly, it will change the situation. Why? As part of the lending process, banks will review your banking and transactional credit card spending to see what you are spending your money on.
So, if you can be a "super saver" and reduce discretionary spending during this period, then your chances of getting approved for your loan and your borrowing ability to be maximized will be absolutely increased.
Family Partnership
As we have mentioned, one of the biggest challenges is to provide evidence. So, let's say we have a young couple applying for a home loan.
Unfortunately, even with their combined income, they simply do not have the service capacity to borrow the amount they need now. Their incomes will increase in the future, but they want to act now. In this case, they could possibly talk to their parents, who might be interested in investing in a small part of the property. What would happen here is that the parent / s would also appear on the title. As a result, the lender will include his income in the assessment of fitness for service.
So, if the opportunity is too good to pass, a joint venture with the parents could be considered.
Adding a whirlwind of income
This is what we call a secondary job. If you are applying for a loan and want financing, and you also want a second or third job, you can increase your borrowing power. Some lenders will immediately assess a permanent income on a pay-as-you-go basis, which would mean that this income stream will immediately add to your services. Note: Occasional "sleight of hand" may require a minimum of work time before being considered taxable income.
Look up and look out of the square
Look at the lawyer's funds or the private loan options. Yes, you will pay a premium for this money, but if you think this opportunity is worthy of the price to pay for interest and higher fees, by looking outside the traditional banks and non-bank lenders, you could end up in a position to access the loan you are after. Make sure to do due diligence first, agree?
Ask a little less
Suppose you really want to borrow $ 500,000, but the bank is only willing to approve $ 450,000. Of course, it's less, but it's still enough for you to invest. So, instead of thinking, "Well, that's all. I can not invest because I can not get approval, "you may need to adjust your expectations depending on the type of real estate investment or location you can buy.
Realistically, if you really want banks to say yes to your loan application, the easiest way to get approval is often to control what you can control. Often, the neglected answer lies in your ability to manage your own money.
At the end of the day, regulatory changes and macro-interventions feel like they're here to stay. Thus, if borrowers can prioritize how they organize, plan and spend their hard-earned money, they can effectively trap a larger portion of their cash surpluses. And with a larger surplus, you have a greater chance of approval. It's as simple as that.
At the end of the day, regulatory changes and macro-interventions appear to be there to stay
Ben Kingsley and Bryce Holdaway
Ben is the founder and Bryce is a partner at Empower Wealth.
In addition to co-hosting the "The Property Couch" podcast, both men are bestselling authors of the Armchair Real Estate Investor Guide and are making simple money again.
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