When applying for a mortgage there are assumptions that people will make, however many of these assumption can ultimately end up causing financial and personal pain.  We thought we would address some of these that we are seeing today.

1. Borrowing for a building project is the same as borrowing to purchase an existing home.  Lenders consider building projects higher risk as there is a high chance of cost overruns on a building project.  They will therefore have stricter criteria and lend to lower levels. 

2. Borrowing for a fixed building contract is the same as borrowing for a labour only contract.  Lenders consider Labour only contracts a higher risk as the chance for costs overruns are a lot higher.  As such Lenders will generally lend to a lower level

3. You can borrow with less than a 20% deposit.  The Reserve bank has imposed very strict criteria for banks and as such Banks only have a small amount of allocated funds available for above 80% lending.  There is the option of Welcome Home Loans however these  have stricter lending criteria including income caps (you cannot earn more than $85,000 as an individual or $130,000 as a couple) and property caps eg in Whakatane you are not eligible if you purchase above $400,000 for an existing house.

4. If you have a large deposit you can easily get a loan.  Lenders will still look at other criteria including credit ratings and income levels to ascertain eligibility.  If you have a big deposit but little income you may not get approval.  The lender does not want to be in a position of having to take a house to mortgagee sale to get their money back. They would rather walk away from the deal.

5. If you are declined by one lender then other lenders will also decline your loan.  This is definitely not the case as there are massive differences in Lenders criteria.  You may struggle with one lender to get loan approval but another lender may fall over themselves to offer you loan approval

6. Lenders will come back with alternatives to loan proposals.  We have generally found that this is not the case.  The Lender will approve or decline the loan request as submitted.  But sometimes if you change the request to accommodate lending criteria they will be able to approve

7. Verbal approvals mean the lender has committed to advancing the loan.  Verbal approvals are worth the paper they are written on.  In our experience Lenders will indicate a positive outcome verbally but unless you have loan approval for the exact scenario that you want then you do not have an approval. 

Solicitors and Mortgage brokers are very good at balancing out assumptions and highlighting when you may be at risk of your expectations not being met.  They can give a general outline to what lenders will accept and decline and they won’t allow you to enter in to a contract without having written unconditional loan approval at the level required to satisfy the legal obligations of that contract.  

This post was written by

Trish Marsden - who has written 5 posts