It’s natural that when you are researching something as important as a home loan, you should do as much research and comparison shopping as possible. However, if you apply for a mortgage through several lenders at once, your vigilance could backfire.
How multiple applications impact your credit score
Multiple applications increases the risk of being declined, and every time your credit application is declined, your credit score is impacted. The credit score is the rating of your creditworthiness, and is calculated based on the information in your credit file, which is your history of dealings with credit providers over the past five years. So having numerous loan applications within a short timeframe can have a domino effect, increasing the likelihood of the next lender declining your loan based on a quick review of your credit score.
This rejection is not as arbitrary as it seems. Lenders do not trust people who make multiple applications because they assume your actions are based on a lack of confidence – they think you are making multiple applications because you are not sure anyone will accept you, or that you are desperate for a quick loan which could mean that you don’t have the means to pay it back. They may also assume that you have been turned down for a loan multiple times, so they save themselves the effort and decide that you are a high risk, so they don’t want to lend you money.
Another issue with multiple applications is that any variations in two separate applications can create anomalies in the information you have presented. This undermines your credibility, as it is essential that all the information you provide is absolutely correct and accurate.
Online enquiries could be applications
Be careful when you compare lenders online, particularly if you provide personal information to make enquiries about the best rates. Sometimes these enquiries will register as applications on your credit file, even if you have not provided supporting documentation along with the enquiry. When other lenders look at your credit file, they can only see that you have “applied” for the loan, and they will assume your application was rejected.
Repairing the damage
While multiple applications or enquiries over a short period of time could impact your ability to secure a loan, the damage is not irreversible. It is a minor and temporary issue in relation to your actual ability to pay back a loan, so your best option is to wait a few months while your credit score improves. To avoid the issue recurring, avoid submitting any financial information online so you can’t accidentally send in a loan application.
If your loan application is declined, it is a good idea to ask exactly why they turned you down. There could be some other issue besides multiple applications, and feedback from a lender could help you rectify the problem before applying elsewhere.
It is a good idea to apply for free access to your credit score before applying for a loan, as you can see for yourself how the lender will see you. This is another opportunity to give the best impression along with your loan application.
How to find the right loan?
It is ironic that you can undermine your financial reputation while trying to research the best loan for your circumstances. The best way to shop around without overdoing the applications is to ask a licensed mortgage broker to apply on your behalf. Your broker can negotiate with lenders to find the right home loan for your circumstances, without submitting multiple credit applications.
If you do need to apply to multiple lenders for whatever reason, just make sure you have a very relevant reason that makes good sense. One of my clients was recently declined from one of the banks but we had explained to the new lender that this was due to the other banks internal policy of having too many properties already under security in that apartment block. That was a perfectly acceptable reason and the new lender approved them with no further issues.
Contact us today if you want assistance or guidance with your next credit application.
Richard Khuong
Director, Simple Easy Finance Pty Ltd
Property & Finance Strategist
E: Richardk@simpleeasyfinance.com.au
