The Perth property settlement process involves moving parts that all need to come together for settlement day. These include paperwork, legal documents and transfer papers.
Finance approval is an important part of the process and one that is delayed or taken for granted by property buyers.
The list of items required to process and approve a financial application can seem painstaking however without it settlement will not go ahead.
When applying for finance it is important to start work on what is needed straight away rather than leaving it until the last minute.
Are you a credit risk or a safe investment?
Your financial institution requires accurate and up-to-date information to be able to process your finance documents. This includes your most recent payslips and bank statements. Why? This is how the bank determines whether you are a credit risk or a safe investment. Your payslips and bank statements provide evidence of savings and spending. They also provide proof your deposit has been accumulated rather than being the result of a win at the races or a lucky night at the casino.
Recent tax returns will be needed to verify earnings, employment and a multitude of other items. The bank isn’t simply looking for details about income. A tax return can provide information about;
- undisclosed partners or spouse,
- outstanding debts and
- investment properties
What your tax returns reveal is a good example of why it is important to be transparent about all your financial obligations when applying for finance approval.
Timing is everything
The timing of your finance application may cause a delay if your most recent tax return is requested and has not yet been completed. When lodging a tax return through an accountant the deadline for submission is not 31 October, but 31 May the following year. Keep this in mind and allow yourself enough time between making an offer and your finance approval deadline to allow for such instances.
The paperwork required may also be complicated for people working in certain industries. For example, a real estate representative will report his/her gross income, however this does not take into consideration the tax-deductible items which can range from;
- clothing expenses
- organisational tools
- property presentation costs,
- professional association fees and
Employees with anything other than a standard PAYG tax return may need to provide copies of group certificates and an employment contract to account for length of employment.
Based on information provided individuals may be asked to explain gaps in employment e.g. stress leave. Again, banks require this information to assess the risk of lending you money.
Complex funding scenarios
If you are self-employed the finance application process can be more complex. Your bank will require;
- details of the business trading history,
- an independent Profit and Loss report from your accountant
- business references
Another example is when the purchaser of a property is a superannuation fund, a family trust or a business. There are several reasons why funding requirements for these types of property purchases can be complex i.e.
- for a super fund to purchase a property, the bank will require all the tax returns for the fund. Typically, these types of funding applications can take weeks and it is not uncommon for the funding application and approval process to take two months.
- these types of purchases can be delayed during the funding application process because of the time it takes to work out the name of the entity that is going to own the property. The owner of property must be an entity or an individual according to Australian law. Any ambiguity regarding the entity or individual whom will take ownership of the property will cause finance approval delays.
Why transparency is the best policy
When it comes to sending documents to your banker, full disclosure is the best policy. The banking officer doesn’t want to see pages one to four of your bank statements with page five missing. This could cause suspicion and that one page could identify a huge overdraft. All pages need to be sent and information needs to be accurate.
This is also the case for dates of employment. Exact dates are needed rather than simply a month and a year. Inaccurate or incomplete information is a flag that something could be off and will more than likely lead the finance officer to dig deeper. It is always better to disclose information fully and be completely upfront.
If you have ever been bankrupt, had an adverse credit history or had dealings with debt collectors it is wise to be upfront about this. It may have been a misunderstanding at the time. For example, you may have had a misadventure buying a couch. It was all sorted out however the furniture company lodged a document with the court that was never withdrawn. This can lead to problems if not disclosed upfront.
Keep in mind, if your finance approval is likely to be delayed, there is the chance that in a ‘soft’ market – as it is now- you could go back to the seller and request an extension. However, on the flipside, in a ‘hot’ market the seller would not likely agree to an extension and the purchase may fall through. Another reason to be on top of your finance approval from the very start.
Plan ahead when setting your finance approval date
We strongly advise buyers to think and plan ahead when it comes to deciding on a finance approval date.
A typical PAYG buyer will need a minimum of two weeks for finance approval and we believe it’s best to have four to six weeks for residential settlements.
Commercial transactions typically require longer.
The number of settlements we experience where buyers go on holiday during the approval process is ridiculous. FIFO workers are another example. If a fly-in, fly-out worker is away and will not be able to get to a bank branch because s/he is on a rig or in the middle of nowhere, it makes sense to extend the finance approval and settlement dates according. The same reasoning is wise if a holiday falls within your finance approval and settlement period.
Think ahead about public holidays during your finance approval period. There are quite a few public holidays between April and June which mean less ‘working days’ for your finance application to be processed.
With the above things in mind, make your finance approval date realistic to avoid headaches and risk of the sale falling through.
Avoid any significant credit card or payment plan purchases before finance approval has occurred. This is a BIG mistake and unfortunately, we see people do it again and again. Buyers get excited about the property purchase and head to a local retailer for 24 months interest free on items for their new home.
In the eyes of a financial institution, large purchases could impede a buyer from repaying a mortgage. The bank may simply decide not to take the risk. Always consult with your finance broker before taking on new debt.
Similarly, a change in job status during the finance approval stage is also not recommended. The bank is looking for consistency of employment and income and may relate to your old job as an A- and your new role as a B+. Believe it or not, this could mean the difference between finance approval and decline. So, hold off.
All of these examples, highlight why it’s vital to provide accurate and detailed information to precipitate your finance application and to think about and leave sufficient time between your offer and finance approval deadline. Plus, its why we suggest doing the work to gather all of the relevant information and paperwork straight away.