Don't have a development site yet? Perfect! Now is the best possible time to think about getting finance for a development property. Sounds crazy? Let me explain...
Getting a mortgage to buy your own home is relatively straightforward. Plenty of people manage it without using a broker. But as a Property Developer? That's when things start to get interesting….
You probably have a structure involved. Maybe a Joint Venture partner or private loan. You might even cross the line from residential to commercial funding because of the size of your deal.
Let's face facts - because your situation isn't straightforward, it's highly unlikely your loan application, whether through a broker or direct to a financier, is going to tick all the right boxes upfront and get approved straight away. So the more you can do to make sure your application ticks those boxes, despite all the complications of your situation, the easier it will be to get finance approval for your development.
There are a lot of things you can do well in advance of applying for finance in order to make the process a lot smoother, and with a higher chance of success. You don't need to have a deal needing finance to begin, either, so the earlier you start getting things in place, the better.
Your Credit Rating
First step is to get a copy of your credit rating and credit score. In fact, don't just get one - get them from all three of the main providers in Australia. Why? You'd be surprised how often different providers have different information. Here are the links:
Once you receive the various reports, go through them and identify anything which might look bad and do everything you can to clean it up. This might involve paying a bill you missed when you moved house, for example.
Another thing to be aware of is that credit providers don't want to see that you've been shopping around for finance, or have multiple hits on your credit for new facilities, such as credit cards.
When a broker is sourcing finance for you, they will potentially submit loan applications to a range of different financiers, to see which one gives the best deal for your situation. This is REALLY bad on your credit file - because next time you apply for finance, a credit provider is going to see multiple entries which didn't result in loans, think you had problems getting finance, and wonder why.
Here's my tip - when you're putting together paperwork with a broker, DON'T sign the privacy statement. This is the magic wand that allows the broker to hit your credit file, potentially multiple times, as part of their due diligence.
Instead, give the broker a recent copy of your credit history to review (usually less than 30 days old), so they don't need to get a new one. Additionally, indicate you will sign the privacy statement when you have conditional loan approval. This little tip is gold, as it means the only time your credit history gets pinged is for a loan that's going ahead. That makes future credit providers much happier!
You can also subscribe to updates from a credit report provider, so you know instantly if your report has been updated with a new entry. It also means you can get an updated report, usually instantly, whenever you need it for a broker.
Ensure Your Situation is Lender Friendly
Understanding what credit providers don't like to see on your application means you can make adjustments now to ensure you're successful applying for finance in the future.
First up, where's your deposit coming from? If it's a gift from your parents, then the longer it's been since you received it, the better. It looks bad if a large lump of cash appears in your bank account as a gift just in time to buy a site. Financiers will ask questions.
Depending on how many months of bank statements they ask for (your broker can give you an idea), it's best if the gift appeared before that timeframe. Generally, they want 3 months of statements, so receive the gift 4 or more months earlier. Another option is to have your parents as guarantors on the loan, although that's one to discuss with a lawyer.
Don't have enough equity? Maybe do a quick, small deal, like buying, renovating and selling a house, to build up a chunk of cash. The more equity you have available, the happier the lender will be. It also reduces your LVR (e.g. you might only need to borrow 70%), which can get you a better interest rate.
What's your work history? If you change jobs a lot, stop doing that! Lenders get very worried when they see that sort of pattern, because it indicates you might not have a steady income to make repayments. They also don't like lending money if you're still in the probation period of your current job. So if you can stay in one job for a reasonable length of time prior to applying for finance, it works in your favour.
Where have you been living? This is similar to work history - lenders will definitely prefer to see that you've lived at the same address for a long period. Or at least that you haven't been moving every couple of months! They like stability.
Credit cards are also a problem if you have a lot of them. Even if they're paid off, they still reduce your borrowing capacity. Having said that, it can help your credit rating to have one card that you pay off every month. So strike a balance - close any you're not using, reduce the limits on any you keep, or potentially consolidate a couple of cards to end up with the same limit on only one card.
Potential Credit Issues
As well as making your financial and life situation as lender friendly as possible, there are specific credit issues you can either reduce or remove if you take action in advance of requesting a loan.
How you earn your income is a big one. Lenders love people in PAYG jobs. They're not so keen on rental income, contractors, child support, and especially foreign income. Add income from property development to that list! Depending on your situation, it may even be worth getting a PAYG job in the period leading up to applying for finance. This is a conversation to have very early on with your broker.
Take a look at what you're providing as security for the loan. Lenders generally aren't very keen on studio (less than 50sqm) apartments, serviced apartments, farms etc as security. It doesn't matter whether that's the property you want to buy, or whether you simply want to add it as extra security for the loan you need - they don't like them. That doesn't mean you have to sell them in order to get a loan, but if that's what you're thinking of buying, you're probably better off buying something they like.
Where you get your deposit can also raise red flags. I've already talked about using a gift for your deposit, but having the vendor finance the deposit or bringing in an investor are also viewed negatively. Think ahead about how best to present those situations. Your broker and your lawyer can help with this.
Are you planning to buy using a structure or company? Uh-oh. This is fine if you're seeking commercial finance, but can be an issue with residential finance. It's not that you can't get finance if you're not buying in your personal name, but be prepared for it to require a lot more time and documentation.
Following on from this, be careful what name you use for your company or structure if you want residential finance. Lenders want you to take out a mortgage and pay lots and lots of lovely interest for 20-30 years. They don't want you buying the property, developing it and then selling again. All those years of interest just vanished. Which means if you name your company "XYZ Developments Pty Ltd" they're really not going to be keen. Use something more generic.
This list could go on a lot longer, but these are the major issues that stop lenders in their tracks. Talk to a good broker as early as possible, so that you can take the steps necessary to either remove these issues or at least lessen them.
Obtaining finance to buy a development site is a key piece in the journey of becoming a Property Developer, so the earlier you start doing everything you can to make sure lenders like your application, the easier it will be.
Getting a mortgage to buy your own home is relatively straightforward. Plenty of people manage it without using a broker. But as a Property Developer? That's when things start to get interesting….
You probably have a structure involved. Maybe a Joint Venture partner or private loan. You might even cross the line from residential to commercial funding because of the size of your deal.
Let's face facts - because your situation isn't straightforward, it's highly unlikely your loan application, whether through a broker or direct to a financier, is going to tick all the right boxes upfront and get approved straight away. So the more you can do to make sure your application ticks those boxes, despite all the complications of your situation, the easier it will be to get finance approval for your development.
There are a lot of things you can do well in advance of applying for finance in order to make the process a lot smoother, and with a higher chance of success. You don't need to have a deal needing finance to begin, either, so the earlier you start getting things in place, the better.
Your Credit Rating
First step is to get a copy of your credit rating and credit score. In fact, don't just get one - get them from all three of the main providers in Australia. Why? You'd be surprised how often different providers have different information. Here are the links:
Once you receive the various reports, go through them and identify anything which might look bad and do everything you can to clean it up. This might involve paying a bill you missed when you moved house, for example.
Another thing to be aware of is that credit providers don't want to see that you've been shopping around for finance, or have multiple hits on your credit for new facilities, such as credit cards.
When a broker is sourcing finance for you, they will potentially submit loan applications to a range of different financiers, to see which one gives the best deal for your situation. This is REALLY bad on your credit file - because next time you apply for finance, a credit provider is going to see multiple entries which didn't result in loans, think you had problems getting finance, and wonder why.
Here's my tip - when you're putting together paperwork with a broker, DON'T sign the privacy statement. This is the magic wand that allows the broker to hit your credit file, potentially multiple times, as part of their due diligence.
Instead, give the broker a recent copy of your credit history to review (usually less than 30 days old), so they don't need to get a new one. Additionally, indicate you will sign the privacy statement when you have conditional loan approval. This little tip is gold, as it means the only time your credit history gets pinged is for a loan that's going ahead. That makes future credit providers much happier!
You can also subscribe to updates from a credit report provider, so you know instantly if your report has been updated with a new entry. It also means you can get an updated report, usually instantly, whenever you need it for a broker.
Ensure Your Situation is Lender FriendlyUnderstanding what credit providers don't like to see on your application means you can make adjustments now to ensure you're successful applying for finance in the future.
First up, where's your deposit coming from? If it's a gift from your parents, then the longer it's been since you received it, the better. It looks bad if a large lump of cash appears in your bank account as a gift just in time to buy a site. Financiers will ask questions.
Depending on how many months of bank statements they ask for (your broker can give you an idea), it's best if the gift appeared before that timeframe. Generally, they want 3 months of statements, so receive the gift 4 or more months earlier. Another option is to have your parents as guarantors on the loan, although that's one to discuss with a lawyer.
Don't have enough equity? Maybe do a quick, small deal, like buying, renovating and selling a house, to build up a chunk of cash. The more equity you have available, the happier the lender will be. It also reduces your LVR (e.g. you might only need to borrow 70%), which can get you a better interest rate.
What's your work history? If you change jobs a lot, stop doing that! Lenders get very worried when they see that sort of pattern, because it indicates you might not have a steady income to make repayments. They also don't like lending money if you're still in the probation period of your current job. So if you can stay in one job for a reasonable length of time prior to applying for finance, it works in your favour.
Where have you been living? This is similar to work history - lenders will definitely prefer to see that you've lived at the same address for a long period. Or at least that you haven't been moving every couple of months! They like stability.
Credit cards are also a problem if you have a lot of them. Even if they're paid off, they still reduce your borrowing capacity. Having said that, it can help your credit rating to have one card that you pay off every month. So strike a balance - close any you're not using, reduce the limits on any you keep, or potentially consolidate a couple of cards to end up with the same limit on only one card.
Potential Credit Issues
As well as making your financial and life situation as lender friendly as possible, there are specific credit issues you can either reduce or remove if you take action in advance of requesting a loan.
How you earn your income is a big one. Lenders love people in PAYG jobs. They're not so keen on rental income, contractors, child support, and especially foreign income. Add income from property development to that list! Depending on your situation, it may even be worth getting a PAYG job in the period leading up to applying for finance. This is a conversation to have very early on with your broker.
Take a look at what you're providing as security for the loan. Lenders generally aren't very keen on studio (less than 50sqm) apartments, serviced apartments, farms etc as security. It doesn't matter whether that's the property you want to buy, or whether you simply want to add it as extra security for the loan you need - they don't like them. That doesn't mean you have to sell them in order to get a loan, but if that's what you're thinking of buying, you're probably better off buying something they like.
Where you get your deposit can also raise red flags. I've already talked about using a gift for your deposit, but having the vendor finance the deposit or bringing in an investor are also viewed negatively. Think ahead about how best to present those situations. Your broker and your lawyer can help with this.
Are you planning to buy using a structure or company? Uh-oh. This is fine if you're seeking commercial finance, but can be an issue with residential finance. It's not that you can't get finance if you're not buying in your personal name, but be prepared for it to require a lot more time and documentation.
Following on from this, be careful what name you use for your company or structure if you want residential finance. Lenders want you to take out a mortgage and pay lots and lots of lovely interest for 20-30 years. They don't want you buying the property, developing it and then selling again. All those years of interest just vanished. Which means if you name your company "XYZ Developments Pty Ltd" they're really not going to be keen. Use something more generic.
This list could go on a lot longer, but these are the major issues that stop lenders in their tracks. Talk to a good broker as early as possible, so that you can take the steps necessary to either remove these issues or at least lessen them.
Obtaining finance to buy a development site is a key piece in the journey of becoming a Property Developer, so the earlier you start doing everything you can to make sure lenders like your application, the easier it will be.
