Having some insider knowledge of the application process will allow you to understand what the lender wants and give you a better chance of getting your loan approved faster. There are three key stages in applying for a loan:
- Completing the application form
- Proof of identity
- Evidence of income
Described below is the general market practice for a prudent mortgage lender.
Completing the Application Form
When you require money to purchase a new property or refinance the debt on a property you already own, you will be applying for a completely new loan.
The application process is an information-collection and processing task for the lender. The lender will want to understand who you are, what you want to use the loan funds for, whether you can afford to repay the loan, and the value of the security property offered.
This will allow the lender to complete its credit assessment. All lenders have a credit policy that sets out their internal guidelines for lending. These policies cover:
- The type of borrowers that are acceptable
- What is an acceptable credit history for the borrower
- The maximum loan amount (based on the income and expenses of the borrowers)
- The maximum loan to value ratio (the percentage borrowed against the value of the security property)
- The type of properties that are acceptable as security
- The maximum loan term
- The interest rates, fees, and charges that will apply
Each lender’s credit policy will be slightly different. Credit risk is a complex field that is constantly changing. Lenders face challenges in balancing market share against credit quality and ensuring borrowers can afford to repay loans.
Generally, you contact a sales representative of the lender and arrange a meeting to discuss the application. At this interview, the lender’s representative will generally complete a needs analysis designed to:
- Confirm the reason you are applying for the loan (i.e., to purchase a new property or refinance an existing property)
- Identify the applicants (and guarantors, if applicable)
- Confirm the product required to match the applicant’s needs (i.e., fixed or variable rate loan, product features such as redraw, etc.)
- Confirm the pricing (interest rate, fees, and charges)
- Confirm the maximum loan amount
- Confirm the important deadlines, including the date that funds are required (the settlement date)
- Make a final recommendation to either approve or decline the application
The interview may be conducted in several ways, including:
- In person at the lender’s offices/branch
- In person at your home by the lender’s representative
- By telephone directly with the lender
- In person with a mortgage broker (either at your home or at the broker’s offices)
- Over the web (at either the lender’s or a broker’s website)
In the current lending market, you generally shop around for the best deal or seek a mortgage broker to help you find an acceptable loan.
TIP: Be prepared at the interview. It will make the process a lot simpler and quicker. Below is a list of useful things to have on hand:
- Know how much you wish to borrow, and make sure you have provided for costs like stamp duty and fees in the total loan amount required.
- Know why you are applying for the loan. Is it for a property you intend to live in, or will the loan be for investment purposes, such as buying an investment property or shares?
- Have a complete list of all your assets and liabilities (what you owe and what you own).
- Know your beforehand after-tax income and have evidence of it with you.
- Give the interviewer clear deadlines for approval.
- Have details of the property being offered as security, including its full address and description.
- If buying a property, provide copies of the contract of sale.
- If refinancing, have your last six months of loan statements showing your repayment history.
- Have photo identification for all applicants and guarantors (at least a driver’s license) as well as other identification like a credit card or birth certificate.
- Provide the address, phone, and e-mail details of the solicitor or conveyancer acting for you (if applicable).
- If possible, have photocopies of these documents ready to give to the interviewer (but remember to have the originals on hand as well).
- Have a list of questions ready to ask.
The first step in the application process is the application form. This may be a physical paper form, an electronic form completed on a computer (by the lender’s representative), a web form you complete, or a simple list of questions asked by a call centre. This form will be completed at the initial interview.
This document is officially completed by the borrower and details all your personal information and your financial position. If someone else completes the form for you, make sure the information contained in the form is correct before signing the document! It’s critical to fill in the application form fully and answer all questions, as this is the key document that the lender will use to process your application.
Simple mistakes here can cause major delays, or even result in your application being declined! Below is a comprehensive list of the information collected in the application form and what it is generally used for by the lender:
- Borrower’s full name and address: Used by the lender to identify the borrower for credit checks and legal requirements. Also to address letters to the borrower and for creation of the legal documents.
- How long you have lived at your current address: Used to assist the lender in the process of identifying the borrower. Also used by some lenders as an indication of an applicant’s stability.
- Contact Details: Generally used to contact the borrower. However, some lenders use this information in the assessment process using a system called credit scoring. Not including contact details like your home telephone number can be detrimental to your credit score.
- Employment Details: The lender will use this information along with your proof of income to calculate your ability to repay the loan and meet your day-to-day living expenses.
- Property Details: The lender will use this information, firstly to confirm the property is acceptable as a security in terms of the lender’s credit policy, and secondly to arrange a valuation.
- Assets and Liabilities Statement: This is a list of what you own (assets) and what you owe (liabilities). Assets are things like properties, cars, boats, shares, cash, personal possessions, etc.
Liabilities are things like loans, credit cards, store cards, overdrafts, etc. The lender will need to know the approximate value of each asset and the balances and required repayments of each liability. Lenders generally need to see an excess of assets over liabilities, meaning you must own more than you owe.
Generally, loan application forms range between ten and fifteen pages. While an application form can seem quite a long document, on average it takes less than half an hour to complete. Lenders and their representatives will generally assist you in completing the form. Many application forms are now electronic.
TIP: Remember to complete the application form in full. Most lenders now use complex credit scoring to evaluate your application.
If you forget to list all your contact telephone numbers (home, work, mobile, and fax if applicable) this may be seen by the lender as a negative. Basically, if lenders put a question on the application form, it’s because that information is important to them!
Lenders collect, store, and use your personal information. However, they must adhere to the Privacy Act, which requires them to store your personal information securely and not to give or sell it without your approval. You also have the right to see all the information they hold on you and make any corrections.
The Privacy Amendment (Enhancing Privacy Protection) Act 2012, which came into effect in March 2014, introduced new regulation around credit reporting. The main participants in the credit reporting system are credit reporting bodies (CRBs) and lenders. CRBs collect your personal information from credit providers, and other sources, to create and maintain a consumer credit report about you. Each CRB may collect different information about you.
Proof of Identity
In US, all financial institutions formally identify their applicants, so you will have to provide proof of identity. It’s a major legal requirement that you can’t avoid.
There are strong legal requirements placed on lenders under the Anti-Money Laundering and Counter-Terrorism Financing Act. All banks, non-bank lenders, credit unions, and building societies who offer loans have to adhere to the act’s minimum requirements.
The past standard for borrower identification was the one hundred point verification scheme established under the Financial Transaction Reports Act 1988 (FTRA). Generally, the lending industry still follows the FTRA requirements to identify applicants by collecting different forms of identification, each of which is allocated a points value.
Applicants are considered to be satisfactorily identified when the total points value of their IDs reaches or exceeds one hundred points. Documents or evidence are split into two categories, primary or secondary. Primary documents score seventy points, but only one can be used in the identification process. Secondary documents or evidence score a range of points from forty to twenty-five each.
The Anti-Money Laundering and Counter-Terrorism Financing Act introduced the concept of “know your customer,” which requires the lender to not only identify the borrower but also collect additional information such as full name, date of birth, and address. Generally speaking, the most acceptable forms of identification are passports, birth certificates, and citizenship certificates as the primary document. Drivers licences, Medicare cards, and credit cards act as the supporting secondary documents.
The application will not be processed without all applicants being adequately identified. If you already have an account with the lender, this requirement will usually be waived. However, the lender may still complete separate identity checks, often electronically.
Evidence of Income
The lender has an obligation to satisfy itself that an applicant can afford to repay the loan, and will complete an assessment based on the income and payment obligations of the applicant. The lender’s representative will insist on evidence of income in the form of pay slips, letters from employers, or bank statements.
Some lenders will want to see copies of the latest tax return and assessment or group certificate from all applicants. Some types of loans do not require evidence of income, or only limited information in the form of a declaration. These loans are known in the lending industry as Low Doc or No Doc, meaning no documentary proof of income was provided.
Such Low Doc loan applications will require the applicant to either sign a declaration that states the applicant’s income and that they can make the required loan repayments (known as a declaration of income and affordability). In No Doc cases, a form simply states that the applicants believe they can make the required repayments (known as a declaration of affordability only).
The National Consumer Credit Protection Act has strong requirements for lenders to prove applicants can make the loan repayments without financial hardship. This may mean that No Doc loans may disappear from the market, and that Low Doc loans will require some form of evidence of actual income.
The application can progress without evidence of income, but unconditional approval cannot be expected without it. Lenders are now taking a more active interest in confirming income, and many now call the employer directly to confirm income.
The application process usually involves an interview with the lender’s representative. An application form will be completed and signed by the applicants and any guarantors. Evidence of identification and income will need to be provided.
The application will then be sent for credit assessment. If you have provided all the information and proof of identity and income, the lender will be in a good position to complete the credit assessment. If you haven’t, you can expect a call from a credit manager, and possibly a delay in getting your loan approved.