How to Improve Your Chance of Getting Financed
When investing in houses, keeping your finances in order should always be a top priority.
Obviously, without the ability to get financing you’re pretty much left stuck wherever you’re at in your property investing journey.
So how can you ensure that you’re ready to meet with a prospective lender?
In a word, preparedness.
Be prepared to answer all of the lender’s questions, and have a few of your own set aside as well.
As you know, banks are in the business of lending.
They’re also, however, in the business of keeping their shareholders happy.
To fulfill their mission to both parties, they prioritise their lending based upon a number of factors, which we’ll get into a bit further on.
What the bank is looking for
Banks take on risk every time they lend, but they do everything they can to minimise their risks.
Note: You too should minimise your risk if you’re investing in houses, to make the most of any gains your portfolio achieves.
Banks will look for:
- A solid employment history
- Savings account with aged funds
- Good credit
- A low debt to income ratio
Each of these factors tell a bank a lot about not only your capacity to pay, but the likelihood that you’ll meet your obligations once you’ve begun investing in houses.
Your ability to pay is not the only thing banks will look at. Since the investment property will be security for the loan, they’ll factor it into their decision too.
- Property location (a/k/a postcode)
- Market drivers (population, economy, suburb yield, etc.)
- Dwelling size
- Housing density
- Exposure (e.g. the lender already has too much capital invested into a particular marketplace)
Note: Even if the bank agrees to lend, if you’re getting mortgage insurance the insurer still has to agree to cover the transaction.
Improve your chances
Lenders use something called a DSR when evaluating your loan application. The Debt Service Repayment formula uses the following factors when determining your financial stability.:
- Net worth
- Employment stability
- Proof of savings
- Your age
- Other assets
- Rental income
Take a look at the following tips. If any of them apply to your situation, make the suggested changes to improve your chance of getting financing.
Reduce and/or eliminate unnecessary expenses
Lots of credit cards?
You might want to limit yourself to a single credit card with a lower available credit, say around $2500 or so.
Because even if you owe nothing whatsoever on your credit cards, lenders will calculate your credit limits in your eligibility, putting a stop to your goal of investing in houses before you’ve even started.
In the bank’s eyes, having the potential to rack up your debt is the same as having done so.
Check your savings
Two things; check to make sure you’re saving consistently (and that your account reflects that) and make sure you have an adequate buffer for unexpected costs and emergencies.
Note that if you’re borrowing more than eighty percent, some lenders will require that your savings be equal to at least five percent of the purchase price of the investment property.
If your savings is haphazard, start making regular payments to your savings account. This shows potential lenders that you’re a smart money manager and it goes towards the buffer that they’re looking for.
How’s your credit?
Check your credit file and fix any errors or omissions before applying for a loan.
If your credit is less than stellar, that doesn’t automatically mean you’ll be turned down. Every lender is different and has different criteria.
Your best option is to meet with a mortgage broker who has experience working with property investors.
What about your other bills?
Are your other monthly bills paid on time and in full? In some cases, delinquent payments will show up on your credit file, this is why it’s important to stay on top of all of your obligations.
Lenders like to see stable employment. Have you been employed at the some position for several years? Even if you’re fairly new to your position if it’s a similar type of job in the same industry might be enough for the lender.
If you’re self employed, you’ll need to prove the income you report. A lender will want to see consistency in terms of your business income.
At the minimum you’ll need to provide the most recent two years of tax returns. Should there be a large disparity of income between those two years, the lender will typically use the lower of the two figures, even if it’s the older tax return.
For the best results, find a good mortgage broker to help you navigate your way among different lending institutions.
Don’t hold anything back
Above all, disclose anything and everything about your financial situation. If a lender discovers something that you failed to disclose they could decline your loan application based on non-disclosure.
If you need help or want more information about your Property Investment strategy, book a FREE consultation with one of our expert Investment Coaches to discuss your situation and investing goals.
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