Having found a suitable property – or preferably whilst looking for a suitable investment property – you will then need to look at financing your investment. There are many ways to finance a property, but let’s assume you plan to approach a traditional lender. This poses the question “what do lenders look for when they assess an application?”.
The first thing they ask themselves is, “Is this borrower an acceptable risk?”. Almost all lenders will make an assessment of whether a borrower can service the criteria as applied by the lender. This is known as credit scoring an application. If your application passes this test, the lender may agree in principle but might still ask for proof of income or proof of residency depending on their criteria.
Each lender uses different criteria so it is worth noting that even if your application is rejected by one lender, another may still be happy to proceed. This process can prove to be quite frustrating. When in all respects you may appear to fit the criteria of a particular lender, you could still fail an actual application if your credit score is poor, but again, each lender is different so don’t let this put you off.
What is important to be aware of though is that lenders make searches against an applicant, so if you apply to one lender and fail, and then apply to another and fail again, your chances of securing a mortgage each time you apply will become less and less likely. One or two rejections on a credit file probably won’t make too much of a difference, but once you get beyond those numbers into multiple rejections, it’s probably going to swing the balance against you.
It’s also advisable not to make more than one application at any one time. If lenders see that you are making multiple applications, they can become suspicious. I am not talking about the situation where you are trying to purchase six properties and so make six applications, but rather the situation where, perhaps to cover your bases and make sure that you do obtain finance, you are buying one property and put applications in with three different lenders in an attempt to increase your chances.
A scenario like this will not only be expensive with regard to fees, but because again, it is likely to reflect badly upon you as all the lenders will be aware of your other applications. Instead, a better route would be to go for a decision in principle with each lender in turn. A decision in principle should only take twenty-four hours so you could wait for the decision, and if it’s a decline, go on to the next one.
Although a decision in principle isn’t binding, it will give you a good idea as to whether you are likely to succeed in your application or not. Often a lender will be looking at things like whether the applicant has had previous mortgages and whether they have been conducted satisfactorily. They will also look to see if an applicant is constantly overdrawn and /or continually exceeds their agreed overdraft limits.
The lender’s thinking behind this is that if the applicant was to buy a rental property and the tenant was to leave, how would the borrower cover any voids when the rent was no longer coming in – especially if they are constantly overdrawn? In this case, the lender may not look sympathetically on the application and the borrower may be considered too much of a risk.
Ultimately though, and regardless of your credit score and to what extent you are considered a safe investment yourself, whether you get a loan or not will depend on the valuation provided by the valuer. That, and the valuer’s comments on the valuation report, so long as the property exceeds the lenders minimum valuation requirement in the first place.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
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