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Recently, we worked with a couple who faced just such an issue: they wanted to purchase their first home, but their loan application was rejected by a couple of local banks. Although they felt upset, they did not give up on purchasing their dream home goal, and chose to seek help from us. based on their friend’s recommendation.

We are very proud to say we did an excellent job and successfully helped them get approval. In addition, we worked very effectively: we spent less than one month from the initial consultation to the clients successfully purchasing a home. Now, the couple is waiting for their dream home to be settled.

We would like to share their story and figure out the reasons that the banks declined their application and why we succeeded in the end.

How we helped clients obtain approval when their application was declined  

Timeline:
1. Case background - 00:30
2. Success factors - 05:34

Background

The clients are a young couple in their 20’s. With a budget of about $850,000, the couple wants to purchase their first home in Auckland.

The wife works part time for a Café, and her net annual income is around $16,000.

The husband used to work for a mechanics workshop, and then he purchased the workshop end of 2018.

The reasons why they were rejected by local banks  

After talking to the clients, we figured out two main reasons that they were rejected by the banks.

The huge difference in their net annual income between 2020 and 2021

According to their financial report, we were initially surprised to find that the business net income in 2020 was only $8,000, but in 2021, it reached $90,000. The gap is over ten times!

Moreover, the mechanics' workshop has been existing for 15 years. As an established business with a15-year trading history, the rapid growth is not normal and may appear to be unsustainable in the banks’ view. And this concern would be one of the main reasons that the banks declined their application.

However, after talking to the clients, we noticed that, even though the company was established 15 years ago, the husband took over the business only in late 2018. Therefore, the previous trading records are actually irrelevant to him. Only the trading of the last two and half years is the result of his management.

As the new owner of the business, the husband developed excellent business and marketing strategies. He did a lot of marketing to attract new customers and improved the quality of products and services to keep repeat customers. As a result, the mechanics' workshop had rapid growth in these two years. We can also evidence the business growth from the GST returns and bank statements. Despite the lockdown this year, the business year-to-date performance is even better than it was in 2021.

So, we are confident enough to present their case to the right lender and explain the reasons that the business grew so much and the sustainability

Other factors affecting serviceability

The serviceability of the client is the main concern for the banks. Apart from the lower business profit in 2020, we also noticed that they have two business loans for purchasing equipment and the company vehicle. Even though the size of these loans (which was around $20,000) was not significant, its implication for the home loan was many times more than the actual loan size. They may not be aware of the fact that the $20,000 business loan can affect a $200,000 home loan application.

After understanding that the clients have enough cash to pay off the business loans, we recommended they pay them off before applying for the home loan again.

From the analysis above,  we think the clients may not explain their story well to the local banks and the banks may not fully understand their business situation, and they probably form an opinion based on the financial statements and the current situation. As a result, the loan application was rejected.

Obviously, the key issues are ‘how we choose the right lender’ and ‘how do we explain to the lender so they can be confidently using the 2021 financial alone with assessing client’s income’.

After understanding the situation and assessment, our team applied our expert knowledge and experiences, we finally succeeded in obtaining approval from a non-bank lender with a reasonable interest rate.

What are the success factors?  

The client didn’t give up

When the application is declined by banks, some clients may consider waiting until they reach the perfect condition before trying to apply again. However, you may never get on to the property ladder as the house price increases and your deposit decrease in value.

In this case, despite the bank declining their application, the couple did not give up trying. This is one of the main critical factors for success.

Trust each other, work cooperatively

Initially, the clients applied for the loan by themselves. But later, they started to seek professional advice and came to us. while working with us, the clients placed great trust in our team and followed our advice. They also took action quickly. For example,  they were actively looking for the right property and made a conditional offer immediately after viewing.  

Plan ahead

As we know the lending policy inside out, we can foresee approval conditions at the time of submitting the application. We can plan ahead and advise the client to meet conditions in advance so they can potentially have an unconditional offer by the end of the finance date.

In the couple’s case, one of the conditions the client can work on while waiting for approval is property valuation. This is because the proposed purchase price of the house is higher than the estimated value bank use, and also the non-bank lender we approached always require a valuation report for property security. So, we ordered the valuation for the clients straightaway. When the clients received the loan approval, the property valuation was ready as well. The clients could confidently declare unconditional on the offer. 

Deep understanding of client’s situation and goals

Another key success factor is from our team. Because our team had a deep understanding of the clients’ situation and goals, we were clear about what result was the clients really wanted and what kind of difficulties we needed to help deal with. With a clear goal, our team customized the plan for the clients and helped them find the best solution. 

Choose the right lender

The policies of different banks and non-bank lenders are different. Our team can help the clients compare and choose the most suitable lender based on our understanding of the policies and vast experience.

With the joint efforts of the clients and our team, the couple finally achieved one of their life goals.

There are a lot of reasons that can cause the loan application to be declined. In this case study, the main reasons are that the clients did not choose the right lender, and their situation was not explained well. Even your application is very straight forward, you may not know what issues you may encounter when you directly work with a lender. Therefore, a professional guide can help you get the best outcome.

If you encounter difficulties applying for your loan, you may need a professional advisor as well to help you make a customized plan and find the solution based on your situation. We are always willing to help you.

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Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.