Steps to loan approval
Charlie Weston outlines the criteria banks adhere to when examining accounts for mortgage approval and guidelines to follow to enable you to be the best loan candidate possible
CASH buyers make up half of the property market. But first-time buyers typically don't buy with cash. This means getting loan approval is the main first step in getting a mortgage which enables a person to buy their first home.
Here Karl Deeter, who is the compliance manager at Irish Mortgage Brokers in Dublin, outlines the things that matter to banks and which they examine when considering a credit application.
The required deposit varies from 10pc to 20pc depending on the buyer.
If you don't have one or access to an equivalent amount then don't bother making a mortgage application, as it is the fundamental first thing needed.
How the deposit comes about also matters. If you won it at bingo or inherited it, then it doesn't mean your loan is a sure thing.
Some lenders want to see evidence of the borrower having built up half the deposit themselves, regardless of where the balance of it comes from.
What banks like best is to know that the regular rhythm of repayments to them will occur and in the run-up to a loan, the best thing you can show is a regular savings pattern that is consistent, year in, year out.
And make sure you do your savings in an actual account (not cash) in your own name.
"We are always surprised by how many people save in an account owned by somebody else to stop them from spending it," Mr Deeter says.
While this may create a barrier to blowing your money, it makes trying to understand your accounts difficult for an underwriter who has to make the decision. So don't do it.
This leads us to the biggest factor of all, which is repayment capacity.
The ability to show you can repay a loan is vital.
Banks stress test loans, while also underwriting them, using their own criteria with the new added layer of limits which are set by the Central Bank. This means that a couple has to have at least €2,000 to live on, plus €250 for each child they have.
Then add on existing debt servicing, if there are other debts as well as childcare costs.
When you whittle it down you are then left with an amount you can afford to repay, but the bank then applies a higher 'stress-tested' rate against this, and it brings you down to a figure that is considered a prudent sum.
Showing your repayment capacity doesn't have to be via pure savings.
If a couple is trying to show they can pay €1,500 a month, and they are renting for €1,300 and saving €300, then that's effectively the same thing as putting aside €1,600 a month.
It just isn't 'savings'.
The ability to support the repayments is what matters, not necessarily where the money is going per se.
People often have some kind of debt when they want to buy a home, this could be a credit card, a car loan or a credit union loan.
Ideally, you want them cleared.
Each loan reduces the amount you might be able to borrow and this leads to limited choices.
Borrowing more just because you can is a bad idea, but not being able to and needing that wiggle room because of a short-term debt is also bad.
If you can't clear debts, ask your broker what you could borrow if you didn't have them, Mr Deeter says.
You will be surprised by the difference it makes, he says.
Lenders may also make it a condition that you have cleared a loan prior to drawdown. If that is a condition, make sure you stick to it or it can undo your entire mortgage application.
What you do for a living
Banks discriminate. It's called 'credit criteria' but in plain English they just don't like certain people.
"We have found getting loans for people in construction difficult even though they were never out of work," Mr Deeter explains. Those on below average wage also struggle because of how credit criteria is created, while there has been an ongoing soft ban on people working in retail.
"Some of this is due to past experience with borrowers," he adds.
It can be extremely frustrating, but the best way around it is to be the best loan candidate you can appear to be, good advice is central to that.
"Give me a bank account and in 10 minutes and I can tell you a lot about a person.
"Spending habits speak volumes about people. In particular, when it comes to things like being overdrawn or missing payments," says Mr Deeter.
Being constantly overdrawn is known as a 'hardcore overdraft' and it is viewed as if you have a loan that has no formal end date. You are borrowing at the end of each month.
Another big no-no is using a credit card to make a cash withdrawal from an ATM.
This is commonly viewed as a sign of financial distress.
Referral fees and unpaid charges on an account will also undo an application. To make sure your spending habits don't bite you in the backside, have an adviser look at your accounts as early as you can to double check them, Mr Deeter says.
Get these things right and you should be mortgage ready.
Then there comes the hard part - finding a home and paying for it.