It happens to almost everyone eventually. You walk into the bank, ask for an amount of money, either to buy a car, house or business and the bank declines you. Today we’ll look at what to do if the bank declines you for a home loan for your next investment property because, according to their calculations, you don’t have enough income.
Typically, the three main questions a bank will ask is :
In “The Successful First Home Buyer”, I suggest the first thing any home buyer should do, long before they begin applying for a mortgage, is check their Credit Report. I have, however, literally never had a client actually have a copy of their Credit Report when they turn up in my office. This is hardly surprising. For most of us, we can pretty sure we know what’s on our report so why even bother to check?
But we have all moved house. Maybe we were flatting with someone who said they would close the power account and didn’t. Or we’ve spent 6 months overseas and forgot to cancel the gym membership before we left. It happens to the best of us and when you come to need a mortgage, the bank is the first to tell you.
It’s also important to have an appreciation of what’s recorded in your Credit Report these days. There should be a record for every Utility Bill and Credit Card that you have stating how promptly you pay it. “0′ means you pay it on time, 1 means “30-59 days late etc.
So while you may not have an unpaid debt, the bank can still easily see how you manage your money.
If it is only a small default, then the first thing the bank will check is if it has been paid. If it is unpaid, this is generally an instant decline. The bank assumes you either don’t take care of your finances enough or can’t afford to pay the debt. Either is not a good reason to extend a mortgage. If you discover a small debt like this, getting it to an a “paid” status is going to get you a lot further.
You, of course, have the right to dispute the debt. If you believe you gave notice to your phone company before skipping off to England, it’s important you get this corrected. The debt will be marked as Disputed and should not appear on your Credit Report. A good place to start with your dispute resolution is here.
Assuming your credit issue is more serious than a rogue gym membership, you need to decide what you’re going to do next. You have several options.
If you are a couple and one person has bad credit, it could be possible to purchase the house under one person. This is tricky as it requires that one person to be able to afford the mortgage (on one salary) and afford the expenses of two people.
However if the main bread-winner in the family has good credit, we have seen this done before. The application is a little easier if the house is bought in a Trust. The applicant with good credit becomes the main Trustee and the sole borrower. Further discussions need to happen with a Solicitor before going down this road though.
Some lenders will happily lend to applicants with bad credit. Why happily? As with the Income and Equity Hurdles, they price their interest rates accordingly. Typically the rates can be as low as 6.5% but can be in the 11%-12% area if your credit is very bad.
Defaults - once paid - are automatically removed from your report after 5 years. This makes sense. It’s simply not fair to taint a person with bad credit for the rest of their life because of a situation they were in almost half a decade ago.
If your debt was almost 5 years ago, it may be worth waiting for the debt to be removed before reapplying with a main bank. In the past it may have been possible to ask the bank to approve in lieu of the debt being removed soon anyway. With credit tightening, this is getting harder to achieve. Most banks will simply request the clients comes back once the debt is definitely removed from Credit Report.
As discussed in the first paragraph, this strategy works a lot better if you already have your Credit Report before you consider applying for a mortgage. Once the bank knows you have had a default, even if it is 4 years and 11 months ago, it is hard for them to "unknow" it. It is better if we present you to the bank in the best light the first time.
Bankruptcy is treated similarly to other serious debts; it remains for 3 years at which point you are discharged. Once you have been a discharged bankrupt for 4 years, you should be clear to apply for a mortgage with a clean credit report (a total of 7 years from initial proceedings).
The only exception to this is if the original debt was to the bank you are applying to. Their files go back longer than 7 years and they usually aren’t as ready to forgive.
As always, the first thing to do with a decline is to find out the reasons. Find out exactly why the bank has said no. Get a copy of what they are seeing. With this information, you should be able to make a good plan with where to go next.
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