How to Improve Your Odds of Getting Your Bank to Say Yes

Raising Bread and Honey

Undoubtedly a Kiwi dream is to own a place of our own. Whether it’s a free-standing house, an apartment, or a tiny home, having a roof over our heads that we can call our own, is something most New Zealanders strive for. Homeownership infuses us with feelings of security and general well-being. It assists us in being settled and helps us forge strong links to our communities.

For most of us, the dream of property ownership results from squirrelling away our dollars, pounds and euros and calling on lenders such as banks to provide the necessary reddies. Banks won’t just lend money to all and sundry, however. You need to prove you’re a solid bet. How to improve your odds of getting your bank to say ‘Yes’ follow the tips in this article.

Types of Lenders

If you’re looking to raise bread and honey (money),  banks and non­-bank lenders are a good source of funds.  In New Zealand, banks are registered and regulated by the Reserve Bank of New Zealand who lay down lending standards and regulations.   These rules are subject to change so when the Central Bank introduces a new rule, all registered banks must follow it.  Frequently, rule changes affect a bank’s lending policies often causing difficulties for potential borrowers.  This is especially so if the individual doesn’t fit the bank’s current lending criteria.  That said, generally, banks offer the best interest rates and terms amongst lenders thus making them the first port of call.

Non-bank lenders are financial institutions that aren’t registered banks.  What this means is they don’t fall under the ambit of the Reserve Bank.  Consequently, this type of lender isn’t subject to the same regulatory control as banks are. Non-bank lenders do still have to satisfy lending standards however set by the Responsible Lending Code.  Because these institutions aren’t subject to the same regulatory requirements as banks, they possess greater flexibility when it comes to granting finance to potential borrowers.  Accordingly, it can be easier to obtain money from a non-bank lender but that usually comes at a price, in the form of application fees and higher interest rates.

It’s important to be aware the process of making a finance application differs amongst types of lenders.  This awareness helps you get your application right, improving your chances of a lender granting you the much-needed moo-la to buy a humble abode of your own.

Getting Lenders to Say Yes

The practice of lending and borrowing money has its roots in ancient Greek and Roman times.  Despite centuries passing, however, the premise of the practice has not changed.  Lenders lend to make a profit.  Borrowers Beg and borrow to acquire.

Lenders like lending to those who want to place their feet on the property ladder.  This is because the security home borrowers offer is the highest most lenders can attain.  That security comes in the form of the lender having an interest in the property, registered in their favour against the title to the property.  This is known as a mortgage. By the bank possessing this registered interest, its position is protected because if the borrower defaults, the lender can seize the home and sell it to recoup the money and interest owed by the borrower. Due to possessing such strong security, banks tend to lend money at lower interest rates than non-bank lenders charge.

The first step to getting a ‘Yes’ from any lender is to understand how they evaluate borrowers.  This understanding will increase the chances of your finance application being approved.

Our Parents Dreaded Having A Mortgage.  These Days We Pray We’ll Get One.

To state the obvious, lenders want to lend only to people they have confidence in.  To assess the likelihood of getting paid, lenders like to know personal details about a potential borrower and legal details in relation to the property they’re lending the money against.  These considerations go to the heart of two important questions asked.  Namely, will the borrower repay the money lent and if a borrower does default, will the lender have some other means by which to recoup the money it’s advanced?  In order to answer these questions, lenders turn their minds to three distinct factors – serviceability, character, and security.  I’ve elaborated on these criteria in greater detail below.

Serviceability

When a lender assesses a prospective borrower, it evaluates the capacity of the customer.  Specifically, it reviews the customer’s capacity.

Capacity:  You may be stable in your residence and employment, live within your means, borrow only for the acquisition of capital appreciating assets and always meet your debt repayments,  but can you actually afford to repay the loan you’re applying for?  Reputable lenders ask this question.  To satisfy themselves, lenders look at your capacity and then conduct a test using their own calculations.  Succinctly, a lender completes a financial assessment to determine what your uncommitted monthly income is and then undertakes a service assessment calculation considering your personal circumstances.

In computing the uncommitted monthly income calculation, lenders deduct all your living costs and debt repayments against all your income.  Given this, it pays to be aware of what is considered income and expenses by a lender.

Surprisingly, not everything you earn will necessarily be thought of as income by a lender.  Generally, 100% of employment income, regularly earned, will be categorised as income but of bonuses, commissions, dividends, overtime etc are often excluded on the basis such income is not guaranteed to be earned. This can have a significant impact on the amount of income  a lender believes a borrower earns, which affects a person’s borrowing capabilities.

Similarly, when determining expenses, more than your actual expenses may be considered by a lender when they are working out what your monthly expenditure is.  For example, if you have a credit card, a notional monthly repayment amount will be factored into the expense calculation.  This is because you might use the card and therefore will need to make a monthly repayment.   The higher the credit card limit, the greater the lender’s notional monthly repayment amount.  It’s for this reason, I recommend you keep credit cards and  limits to a minimum as they reduce borrowing capacity.  The same rational applies to individuals who have existing lending facilities such as lines of credit (revolving credit facilities, overdraft facilities).  Even if these have not been drawn upon, a lender will assume you could use them and will compute a notional monthly repayment amount when undertaking their expense calculations.

Sometimes borrowers try to minimize their declared expenses by reducing down their monthly expense totals.  Unless there is good reason, this rarely works.  When a borrower’s stated level of expenses falls below a lenders pre-determined level, the lender will attribute their own level of expenses to the application.  This quantum of expenditure is influenced by the type of applicant.  For instance, an individual making an application will be attributed a lower level of expenses than joint applicants with children.

After assessing income and expenses and computing a borrowers uncommitted monthly income, lenders conduct a service assessment calculation.  This involves the lender factoring into the equation the monthly loan repayment the applicant would need to make if the loan was granted to them.

When making this calculation, lenders base their calculations on the premise a borrower is taking out a principal and interest loan even when the loan application is for an interest only loan. Additionally, a lender uses a qualifying interest rate opposed to using the actual rate the loan would be offered at.  This qualifying rate is the actual interest rate plus a buffer of between 2% and 3%.  Both of these actions make the notional loan repayment amount greater than what it will actually be.  This can result in an applicant’s monthly expenses seeming to be too high for them to qualify for loan they have applied for.

Applicants should bear in mind lenders can and do conduct different service assessment calculations.  Thus, just because one lender declines an application it doesn’t automatically follow all lenders will refuse to lend funds.

Character

You might be deemed to qualify for the loan, but will you actually repay the lender what they’ve lent you? Will you honour your loan repayments on time, all of the time?  To answer these questions lenders review a borrower’s character and consider the matters below.

Personal Stability:  Explicitly, a lender will attempt to identify how stable a borrower is.  Accordingly, when they review your application, they’ll want to know how long you’ve resided at your current residency, what your job is and how long you’ve been employed in your role.  They may review your history gathering details about your last two or three residencies and employment roles when determining how steady you are in personality.

Account Conduct:  Lenders are interested in assessing your ability to manage money.  Accordingly, they will review your bank and credit card statements.  Predominately, lenders evaluate if you operate your accounts in unauthorised manners such as breaching pre-approved overdraft limits and taking out cash advances on your credit cards to help pay your way through the month.  By examining these matters, lenders gain ideas about your competency to manage your own affairs, your ability to live within your means and your money management habits.

Credit History:  Lenders study hard your credit history.  They’ll obtain a credit history report to tell them who you’ve borrowed money from and if you’ve ever default on repayment of a debt.

Repayment History:  Finally, no lender likes to lose money.  They want to feel confident the money they lend you, will be repaid to them.  To develop that confidence, lenders check your repayment history of your previous debts.  They’ll verify if you’ve historically made loan repayments consistently, on time, every time.  Largely, a lender is determining the level of seriousness you show in meeting your financial commitments.

Security

Once a lender has reviewed serviceability and character criteria, they’ll want to gather information relating to the collateral you intend to provide for the loan and the capital you’re personally intending to contribute.  Specifically, lenders focus on collateral and capital when reviewing the security on offer.

Collateral:   A borrower can pass with flying colours a lenders serviceability and character assessments, but risk can still exist that threaten repayment abilities.  This may be in the guise of an event beyond a borrower’s control.   For instance, a borrower may fall ill or be made redundant, preventing them from earning income and meeting their loan repayments.  For this reason, lenders like to take security over an asset.

By taking security, a lender gains collateral – that is something solid and substantial to back the borrower’s promise (pledge) to repay the loan.  This gives comfort to a lender they won’t be left high and dry should a borrower default irrespective of the reasons why the default occurs.  Usually the asset that is pledged as collateral is something tangible like real estate.   Hence if the borrower defaults, the loan is able to be repaid by the pledged property being sold and the sale proceeds being repaid to the lender to satisfy the borrower’s debt.

Clearly, the quality of the asset that is offered as security is paramount.  For this reason, a prospective lender will want to know details about the ownership title of the property.  Frequently lenders hold particular views on differing titles to realty.  For example, banks tend to prefer a fee simple title over a leasehold title.  Some lenders will refuse to accept certain collateral as they consider it inferior.  Leasehold title often falls into this category.

In addition to reviewing title to a property, lenders want to ascertain the value of the property.  For this, they may require a valuation conducted by a registered valuer.  They may also demand to review any reports that’s been complied in relation to the property they’re going to lend against, such as weather tightness and engineering reports.

Overall, the above permits a lender to form a view on the strength of the asset you’re offering them as collateral to back your borrowings.

Capital:  All lenders want to know how much skin in the game a borrower has.  Lenders determine this by asking how much money a borrower is intending to contribute towards the purchase of an asset.  This is referred to as ‘capital’.  Lenders believe the more capital a borrower contributes, the lower the risk to them is of a borrower defaulting.  Research has shown a relationship exists between the size of a borrower’s contribution to  property’s purchase price  and the crystallisation of repayment defaults. As a borrower’s personal contributions increase, the risk of a default occurring falls.  Borrowers with a high percentage of their own money in a transaction go above and beyond to ensure repayments are made on time, every time, to a lender.  Accordingly, those borrowers who are able to contribute relatively high amounts of their own funds towards a property purchase, are viewed by potential lenders more favourably than those that have little of their own money involved in an acquisition.

Documentation Lenders Require

Irrespective of what type of lender you apply to for finance, documentation to verify the information you’ve provided in your loan application will be required.  Such information centres around a borrower’s personal character, financial capability , credit risk and the strength of security profited.  Gathering the raft of documentation needed to support a loan application is time-consuming so it’s important to get yourself ready to make the application in advance of needing to do so.  In the main, you’re likely need to provide the following :

1. Identification – Usually a current passport and driver’s licence will suffice.

2. Residency – A piece of mail confirming your current physical home address, such as a rates bill or a utility account, will be acceptable.

3. Employer Details – If you’re employed, details of the position you hold, your annual salary and the length of time you’ve held your role may be demanded by lenders. Often a copy of your employment contract and/or a brief letter from your employer, will satisfy this requirement.

4. Proof of Income – Employed Persons – Copies of recent pay slips and/or bank statements showing your pay directly credited to your bank account will be needed.

5. Proof of Income – Self Employed People – Copies of your income tax returns and annual financial statements will be required if you’re self-employed. Some lenders may demand to sight several years’ financial statements depending upon the size of the loan you’re applying for. In some circumstances, financiers may also want to view management accounts for the business.

6. Credit History including Banking History – Lenders run their own credit checks on prospective borrowers so you won’t have to provide a credit report. What you will need to provide however are details in relation to your existing loans and financials obligations. As such, loan statements showing current balances outstanding, together with the last three months’ bank statements revealing your repayment history, will be required by a lender.

7. Proof of Assets – Copies of documents which prove you own certain assets will be needed. For instance, a lender will expect to see copies of ownership documents depicting you own an asset and/or statements noting the balances held to your name such as those you have in a superannuation/managed fund.

8. Contracts and Agreements – If the loan is for the purchase of a property, a copy of the Agreement for Sale and Purchase will need to be produced.

9. Valuation – Lenders want to know what the security (property) is that’s going to back the loan they extend and how much that security is worth. For this reason, they frequently request a valuation. Sometimes this can be a relatively informal document such as a Rating Valuation provided by a local Council. Other times a valuation from a Registered Valuer, addressed to the lender, will be required. If this is the case, it’s important to obtain the valuation from a Valuer that is acceptable to the lender. Acceptance by the lender of the Valuer selected should be obtained before a borrower instructs a Valuer and pays for that service.

10. Insurance Cover – All lenders want to know their security is protected. Accordingly, they’ll require proof that the property is adequately insured and that their interest as a lender mortgagee is noted on the insurance policy. This may take the form of a copy of the insurance policy itself together with a receipt for payment of the annual premium or a note from the insurance company noting the property is insured.

11. Other Miscellaneous Information – Depending upon the purpose of the loan, lenders may request additional documentation. For example, if you’re applying for a loan to buy a home, a lender may wish to see a builder’s report detailing the condition of the house. Alternatively, if you’re seeking finance to purchase an investment property, a lender may require a rental appraisal showing how much rent is anticipated being received each week. In circumstances where the rental property is already tenanted, a copy of the tenancy contract noting the name of tenant together with rental details is likely to be required.

12. Mortgage Application – A completed loan application, signed by you, accompanied by the above documentation is obviously going to be needed to apply for the loan. Your loan broker will assist you in filling out this document.

Give Yourself a Competitive Advantage by Following Two Golden Tips

Finance Tips

The more you can prepare before you make an application the better.  So here are a couple of tips to help you along the borrowing home ownership route.

TIP 1:  Don’t Give Up Your Day Job

Above and beyond everything else, lenders want to know you’ll repay the money they lend to you.  So no matter how excited you get about a project or a side hustle,  don’t give up your day job before applying for a loan.  If you have to leave the comfort of receiving a regular pay cheque, don’t quit until you have your lending in place and can realistically afford to relinquish that steady income source.

TIP 2:  Clean Up, Stay Clean, Repeat

This matter follows on from the above point.  To gain comfort, lenders procure credit reports which provide credit scores. To gain a favourable score, pay your bills on time, every time.  Be scrupulous in this respect.  If you’ve got historical bad debt repayment issues, help yourself by cleaning up your financial behaviour, operating within your credit limits and paying your accounts on time.  And then… stay clean.

Calling in Help

The finance application process can be bewildering and complex.  It can be difficult to know where to start sometimes.  It’s for these reasons, I recommend using a loan broker.  They are worth their weight in the gold you’re going to borrow.

Loan brokers function as intermediaries (the middleman) between a borrower and a lender.  They collaborate with people who need finance and institutions who lend money.  They help borrowers obtain finance that best suits their circumstances, needs and objectives.  They’re familiar with the laws that affect borrowers such as the Credit Contracts and Consumer Finance Act and its myriad of amendments.  They interact with a variety of lenders and understand the application criteria different lenders apply to borrowers.   As a result of their daily work, they have up-to-date current market information on terms, conditions, and interest rates at their fingertips.  Many brokers also run computer software programmes which detail how a borrower’s financial position will be viewed by various lenders.  Ultimately all the attributes a broker possesses, enable them to present a borrower’s loan application to the right lender/s in such a way it has the best possible chance of being approved.

In particular, a loan broker will assess a borrower’s financial affairs, help them complete the requisite paperwork and present a borrower’s application to potential lenders.  When an offer is extended by a lender, a broker will discuss that with a borrower, ensuring all conditions are satisfied thus enabling the draw down of the loan.

Clearly, those loan brokers who are informed and experienced have a greater understanding of the loan market than what a single individual possesses.  This flows through to negotiating skills.  Consequently, in my opinion, a good loan broker is more likely to procure a better deal than a person acting on their own behalf can.

Be grateful. You’re about to embark on a journey many won’t ever get to take

Summary

Buying your own home is one of the most worthwhile assets you can invest in.  It gives you comfort, control, stability and security but increases your wealth over time.  This is especially so if you’ve followed the tips I’ve provided in my book Women & Money: Mastering The Struggle.

For most of us to achieve a crib of our own, we need to beg and borrow from lenders.  These days, making an application for finance is akin to painting a masterpiece – it’s an art in itself.  Getting a lender to say ‘Yes’ is easier with a good loan broker on your side.  On that note, whilst the business of obtaining finance and house shopping can be stressful, remember to be grateful and excited … you’re about to embark on a journey that many these days won’t get to take.  Happy shopping.

 

Ciao  Janet

 

Janet Xuccoa is a successful professional, holding both commerce and a law degree. She acts as the Commercial Affairs Manager and Trust Advisor at Greenlion, a chartered accounting firm, helping people protect their wealth for themselves and their loved ones.

Over the years, Janet has written several books on money and trusts. Her book,  ‘Women & Money : Mastering The Struggle’ is an easy read, furthering women’s financial education and empowering them to build the financial lives they want to lead.