08 Apr Importance of full disclosure when applying for a loan
You may have read on loan application forms that it’s important to completely disclose your financial situation. It’s possible that you’ve dismissed it as well and thought that telling a couple of white lies won’t hurt, but it actually can.
In the best case scenario you’ll have applied for a loan and lied about your income. Most commonly people will inflate their income to sound much higher than it actually is. The result of this lie is that you get a loan that you otherwise wouldn’t be able to afford based on the metrics lenders use and that you’ll need to pay it back at the rate that’s been set based on your false income. I once heard of a guy who did this when he bought his first home. He was lucky as he made sure that he didn’t miss a single repayment. Later on his income increased and he continued paying his mortgage as if the lie had never been told.
If you’ve lied on your loan application and you’re lucky, the lender won’t find out that you falsified your documentation and you’ll need to increase your repayments to make up for the shortfall. This could mean that you end up paying $800 a week on your mortgage as opposed to $700 for a short period of time. If of course you’re unlucky then your mortgage repayments will fall into arrears and the lender will foreclose on your property meaning you’ll lose it. Sometimes you’ll end up with some money to go towards your next property, but normally if this happens you will still wind up with a large debt. The lender may potentially allow you to refinance.
In the true worst case scenario the lender will find out that you falsified your information, which amounts to fraud and is a state and federal crime. If this happens then you could find yourself being prosecuted in the legal system.
If you do falsify your information then these are three possible outcomes, but you need to know why you should be honest on your loan application.
Let’s say you want to buy a property, in some cases $20 per week can make a huge difference to your capacity to pay back the loan and could be the difference between being matched to Lender A or Lender B. It could be that Lender B is the better one for your true circumstances rather than Lender A. You may find though that you were matched to Lender A because you falsified information. Most lenders actually want to help you get a mortgage and would rather you were honest with your financial situation. it allows them to accurately assess the merits of your application. By not being honest you’re doing yourself a disservice and could find that you are more susceptible to mortgage stress. For those who don’t know, mortgage stress is when your capacity to pay back a loan is over the recommended limit, so for example, if you were paying 28% of your income on your mortgage that is okay, but 31% isn’t. The recommended proportion of your income that should go on your mortgage is 30% of your income.
There are a myriad of other reasons why you should always disclose your financial position when you’re applying for a mortgage, but these are just a few. As always, if you’re unsure of anything, then in line with Australian Responsible Lending Guidelines, contact our team for further information so we can discuss your individual financial position.