When knowledge gives you such an upper hand over the competition, understanding how the mortgage process works is a smart decision.
It’s one that pays, too. If you want to guarantee the sale and your commission, you need to ensure that your buyers can actually purchase the property. If they’re rejected by a bank for a mortgage, you’re not likely to get very far.
Surprisingly, there are a number of reasons banks reject mortgage applications that you might not necessarily be aware of.
1) The lender’s policy
It’s not unknown for lenders to change their lending criteria. In fact, they do it fairly regularly, and don’t often give much notice.
This means that, although your buyers loan structure may have been okay the last time they bought a property, it might not be okay this time around. Requirements lenders commonly put in place are larger deposits, lower loan-to-valuation ratios, and a sharp reduction on the number of interest-only loans.
2) Adverse credit file listings
When deciding whether to offer a mortgage, lenders rely heavily on the information in your buyer’s credit file. This includes absolutely everything from a default on a utility bill 2 years ago to late payments on personal loans and applying for a large number of credit cards.
Giving a buyer a mortgage is a risk for a financial institution, as they lose money if regular repayments aren’t made. If your buyer has a bad credit history or adverse listings on their credit file, it could be looked upon negatively.
There isn’t a quick fix to this sadly, but if you’re aware of any bad credit history you’ll be able to prepare the chain or revisit whether they’re a suitable buyer.
3) Previous conduct with a lender
If your buyer has a long history of overdrawing on their debit cards and failing to make regular repayments, it’s not hard to see why the lender might say no.
This might sound obvious, but lenders will sometimes choose to rely on their own history with a borrower than an external history of their other financial interactions. Even if your borrower has been sensible with their finances for the past 5 years, they could be knocked back by their early history with that particular lender.
Before moving forward, ask your buyer which lender they’re going with and if they’ve dealt with them in the past. This will help to prepare you and your seller for any issues that could arise.
4) Handicaps for self-employment
When lending for property purchases, banks look heavily in favour of those with long, sustainable earning histories. Sadly, this is something that few self-employed people can provide. With earnings often varying wildly from month-to-month, mortgage lenders usually ask for a much longer earning history as a guarantee they’ll be able to make the repayments.
Before progressing with a buyer, ask them what they do for a living and how long they’ve been doing it. If they talk about how good this year has been in comparison to last year, they could run into financial issues.
5) Wrong type of property
Valuers are sent to properties to ensure the purchase price is representative of the property’s market value, but also to see if the property will be a risky security for the lender. This is because, if your buyer defaults on payment, the lender will need to sell the property quickly and easily to recoup any losses.
This leads to some properties being turned down by lenders, often including small studio apartments, certain postcodes and zonings, and some high-rise developments. All of these can lead your buyer’s ‘loan subject to valuation’ being turned down at the last minute.
For this reason, it’s sensible for you to develop relationships with lenders. Find out what they like and don’t like and you’ll be able to keep any prospective buyers in the loop when they settle on a property.