Fifteen common home loan application mistakes, and what to do instead

How a lender reads a home loan application

Every lender writes its own credit policy, and those policies differ more than the advertising suggests. Underneath the differences, an assessor is working through the same three questions on every file that reaches their desk.

• Could you repay it — your assessable income, less your commitments and living costs, tested at a rate above the one you would actually pay
• What happens if you cannot — your deposit, the loan to value ratio, and the property itself as security
• Does the file hang together — whether your documents, your statements and your declarations all say the same thing

The third question is the one borrowers underestimate. An assessor who finds one thing that does not match starts reading everything else more closely, and a file that has to be argued for is a file that could be declined.

Mistakes made before you apply

These are the ones with the longest lead time, which makes them the cheapest to fix and the most expensive to ignore. All five are decided before a single document is submitted.

1. House hunting before you know what you could borrow

It is the natural order for a buyer and the wrong one for a lender. Falling for a property before you know your borrowing position sets you up either for disappointment, or for rushing an application to keep pace with a seller who has other offers in front of them.

Knowing your position first also changes how an agent reads you. A buyer who could move quickly is a different proposition to one who is still finding out what they could do.

One caution comes with that figure. The maximum a lender is prepared to approve is a ceiling produced by its own policy rather than a recommendation, and borrowing to the top of it leaves nothing between you and a rate rise, a repair, or a quieter few months of income.

2. Treating a pre-approval as an approval

A pre-approval is a lender's conditional opinion, formed from what you have told it and what it has verified so far. It is not a loan, it carries conditions, and it has an expiry date.

Two things follow from that. It could be withdrawn if your circumstances change, and it could lapse quietly while you are still looking, which is worth diarising rather than discovering.

3. Applying to several lenders at once

Sending applications to three lenders to see which one says yes first is close to the most self-defeating thing a borrower could do. Each application leaves an enquiry on your credit file, and a cluster of enquiries in a short window reads either as shopping in desperation or as something being hidden.

The alternative is to work out which lender's policy actually suits your file, and then apply once. Comparing lenders thoroughly is worth doing; comparing them by applying to all of them is not.

4. Never looking at your own credit file

You could obtain your own credit report from each of the credit reporting bodies, and doing so does not affect your score or show up as an enquiry. People are regularly surprised by what is sitting on theirs.

An old default, a telco account you were sure was closed, an error recorded against a similar name — every one of those is easier to deal with before a lender raises it. Some corrections take a while to work through, which is the other reason to look early.

5. Changing jobs, or your employment type, just before you apply

Lenders want income they could rely on, so continuity matters as much as the amount. A move within the same field with no probation period is commonly fine; going from permanent employment to casual, contract or self-employed work usually is not, at least not straight away.

If a change is coming, raise it before you apply rather than after. Sometimes the answer is to apply first and sometimes it is to wait, and that decision depends on the lender's policy rather than on how the move feels to you.

Mistakes in what you declare

A lender verifies what you declare against your statements and your credit file. Every mistake in this group is the same mistake in a different coat: a gap between what you said and what the documents show.

6. Understating your living costs

You will be asked what your household spends each month. Declaring an implausibly low figure gains you nothing, because lenders compare your declaration against a benchmark for a household of your size and income, and use whichever is higher.

What it could cost you is credibility. A declared figure your own statements contradict is exactly the kind of discrepancy that makes an assessor read the rest of the file harder.

7. Leaving credit card limits open

A lender assesses a credit card on its limit rather than on what you owe. An unused card with a large limit reduces your borrowing power as much as one that is close to maxed out.

Paying the balance to zero changes nothing on its own. Closing the account, and having the closure confirmed in writing, is what takes the repayment out of the calculation.

Closing a card you have held for a long time is not free of cost, though. It shortens the credit history sitting on your file and changes how much of your available credit you are using, both of which feed a credit score, so a long-held card with a modest limit is worth a moment's thought before it goes.

8. Ignoring buy-now-pay-later and the small debts

Buy-now-pay-later accounts, small personal loans and interest-free store finance all show up, and all of them come off the surplus your loan has to be serviced from. Regular use also tells an assessor something about how the household runs, which is a separate judgement from the arithmetic.

Clearing and closing these entirely, rather than part way, is often worth more to an application than the balances suggest. It is also one of the few levers that could move within a month.

9. Leaving something off the form

Things get left off applications constantly: a second job, a HECS or HELP balance, a dependant, a guarantee given for a relative's loan, a debt the borrower is embarrassed about. Some of it is genuine uncertainty about what counts, and most of it is visible to the lender anyway.

Assume everything comes out, because it usually does. A commitment declared upfront is one number in a calculation; the same commitment found later is a question about everything else on the form.

10. Account conduct you would rather nobody read

Lenders read your transaction statements, not just your balances. Dishonoured direct debits, an account that goes overdrawn most months, regular gambling transactions and repayments to a loan you did not declare all get noticed.

None of that is a moral judgement. It is evidence about whether a repayment would be met, which means the months before an application are not the time to run the account hard, and are a good time to make the pattern boring.

Mistakes with the deposit and the paperwork

11. A deposit with no history behind it

Many lenders ask not only how large your deposit is, but where it came from and how long you have held it. The term for what they are looking for is genuine savings, and it is a policy requirement rather than a judgement of character.

A gift from family is commonly accepted as a deposit, though often not as genuine savings on its own, and it generally needs a letter from the person giving it confirming that it is a gift and not a loan. This is the requirement that most often holds a purchase up, because the remedy is usually time and time is what nobody has once an offer is in.

12. Budgeting for the deposit and nothing else

The deposit is not the only cash you need on the day, and the rest of it catches people out late. Transfer duty in Western Australia is assessed by RevenueWA on the property value, and it sits alongside a list of smaller costs that add up.

• Transfer duty, assessed by RevenueWA on the value of the property
• Settlement agent or conveyancer fees
• Lender application, valuation and settlement fees, where they apply
• Lenders mortgage insurance, if your deposit sits below the lender's threshold
• Building and pest inspections, before you are committed rather than after
• Removalists, connections and the work every house seems to need immediately

13. Sending in whatever paperwork is to hand

Applications stall on documents more often than on policy: payslips that have gone out of date by the time the file is read, a tax return that was never lodged, a statement photographed with the balance cut off the edge.

Organised paperwork does more than save time. A complete, legible, internally consistent file reads as a competent borrower, and that impression carries into the judgement calls that either go your way or do not.

• Photo identification, current and matching the name on everything else
• Recent payslips, with a year-to-date figure that agrees with them
• Recent statements for every account, loan, card and buy-now-pay-later facility
• Your tax returns and company financials if you are self-employed, lodged and up to date
• Evidence of your deposit, and of how it accumulated
• A rental ledger or statements showing rent paid, if you have been renting

Mistakes made after the application goes in

An approval is a photograph of your position on the day it was assessed. Between that day and settlement, the lender could look again, and plenty of them do.

14. Taking on new credit before settlement

It is a familiar sequence. The approval comes through, the furniture goes on interest-free terms, and the car gets upgraded for the new commute.

Each of those changes the servicing calculation the approval was built on, and many lenders re-check your credit file before funds are released. An approval could be reduced or withdrawn at that point, which is the worst possible moment to find out.

15. Forgetting that the lender is assessing the property too

You are not the only thing being assessed. The lender values the property, and applies its own policy to the property type, the size, the title and sometimes the postcode.

A valuation below the contract price leaves a gap you have to cover in cash. Small apartments, unusual construction, rural blocks and off-the-plan purchases are all places where a lender perfectly happy with you could still be unhappy with the security.

What to do instead

Almost everything above reduces to two habits. Find out where you stand before you act, and make sure every part of your file says the same thing.

• Have your borrowing position assessed before you start looking seriously at property
• Obtain your own credit report and deal with anything on it early
• Close the credit cards you do not use, and reduce the limits on the ones you keep
• Clear small consumer debts and buy-now-pay-later accounts entirely, rather than part way
• Keep saving into one account, so the pattern is visible without having to be explained
• Keep your account conduct clean and explainable for several months before you apply
• Get your documents complete, current and legible before the file is submitted
• Change nothing about your job, your debts or your spending between approval and settlement

Then apply once, to a lender whose credit policy suits your file. The advertised rate is the easiest thing to compare and the least useful basis for choosing, because a lender with an attractive rate and a policy that shades your kind of income is a decline with good marketing.

That is the part a broker is genuinely for. We could not make a lender say yes, and any broker who suggests otherwise is not worth listening to — what we could do is work out which lenders would look at your file favourably, put the case together so it does not have to be argued for, and tell you when the honest answer is to wait a few months and apply from a stronger position.

Everything here is general information. Any outcome is subject to lender approval, to a valuation of the property you choose, and to your circumstances at the time you apply, and lender policy varies and changes without notice.