Securing finance for a home can be challenging, with ever-changing interest rates, lending restrictions, and strict banking criteria often making it hard for buyers to get approval. Comprehensive income and expense assessments can also be a significant hurdle for many aspiring homeowners.

But there are some extra layers of complexity that often aren’t widely known, meaning careful planning and, in many cases, professional advice are often needed to get your application over the line.

So, what are some of the things you need to be aware of when applying for finance, and what are some of the things that can catch you out?

1 - CREDIT SCORES

Vega CEO Harry Ferreira says when it comes to your application it’s important to know that your credit score with the bank isn’t the only thing that’s considered.

“You need to look at your account conduct too, and it’s very basic but even this trips up people who earn million dollar plus salaries.”

“People can be earning lots of money, but they don’t always manage it well.”

That includes things like overdrafts, missed credit card payments or delayed utility bill payments.

“All of that gets taken into consideration.”

“If someone is earning over a million dollars that will be a mitigant, but if they’re earning more like $80,000 - $100,000 per year then it’s not as easy.”

Ferreira says another big factor for the banks is how many buy-now pay-later platforms you’re using.

“Whilst that won’t determine whether you get finance or not, if people are using a lot of those platforms they are taken into consideration by the credit team.”

Lastly, Ferreira says many people might not be aware of this, but lenders also pay attention to how many credit checks you’ve had done.

“So, whether it's been at Michael Hill, Spiers Finance, BNZ or Westpac - they can see all of that on your credit check history.”

“If you're applying for a home loan, every bank is going to do a quick credit check on you and that makes sense. But if you’ve had a number of credit checks over the last three months then the bank is going to start asking some questions.”

It’s not just the last three months that you need to consider either, because every credit check you’ve had in the last seven years is discoverable.

“The assumption then becomes that you are desperately looking for finance. So especially if it’s your first time buying it’s always good to prepare yourself.”

“You may want to go and buy that engagement ring or get two new credit cards from Westpac before applying for your home loan at BNZ but all of that will be seen.”

Ferreira says that doesn’t mean it’ll lead to a no, but it will lessen your eligibility.

“Let's say your credit score is 1000, every credit check that you had, whether they go ahead or not, may take 25 points off. So you know, if you've had four in the last month that would take it down to 900.”

2 - KIWISAVER & UNFORSEEN COSTS

Ferreira says people can often get tripped up by KiwiSaver.

“What clients normally do when they buy a home for the first time is they draw on that money, but they might leave it until two weeks before settlement.”

But with longer lead times, Ferreira says buyers should be thinking about this four to six weeks out because it can take 10 business days to release your KiwiSaver.

“Sometimes it can take much longer too. Last year, we had a client where it took 21 days to access and they missed their settlement, so they were frantically looking to close that gap.”

Ferreira says it’s also important to consider the cost of all the added extras too.

“You need to take into account your legal fees, valuation costs and moving costs which can make finances super tight especially if it’s your first home.”

“Sometimes there are cases where people have done everything they can to get into a home, but they've left their KiwiSaver release date until the last possible moment, and then they haven't covered $1800 in legal fees, or $2500 in moving fees and that can really add to the stress of it all.”

3 - EMPLOYMENT STATUS

Ferreira says your employment status is also really important especially if you’re self-employed.

“Banks are strict around this. You’ll need two years of bank statements and really need to make sure that you’ve dotted your I’s and crossed your T’s.”

Ferreira says lenders are harder on self-employed people because it can be easy to forecast your numbers to make it look like you’re earning more.

You also need to pay special attention if you’re looking to change your job, or if you’ve switched roles already in the three months leading up to your application.

“So, you need to make sure you've got your contract and that you've got your new employment payslips too. Banks will usually ask for three months’ worth, but sometimes they’ll ask for more.”

Ferreira says another thing to think about is commissions.

“This is a big one especially for those people working in real estate, finance and sales. Often, they’ll have a smaller base but will be reliant on commissions to get over the line. What the banks will be looking at then is the consistency of the commissions.”

“What they’ll typically do is ask you to show the last two to three years of commissions. If they have changed a lot, they’ll average them out over that time period.”

4 - STRESS TESTING & DTIs

While it can be easy to just focus on the interest rates being advertised, Ferreira says it’s important to remember that banks will test your ability to service a loan on interest rates much higher than that.

“Most have their interest rates sitting in the fives or the early sixes, but people are still being stress tested at 8%.”

Which means your finances need to be able to cope with that before you’re granted a loan.

Ferreira says the other thing to consider is debt to income ratios (DTIs). Debt to income ratios mean exactly that - the amount of debt a borrower has taken on relative to their gross, or pre-tax, income. If you’ve borrowed four times your income, you have a DTI ratio of four. If you’ve borrowed eight times your income, your DTI ratio is eight.

Your total debt will include things such as any existing home loans, personal debts (e.g. car loans), and student loans, as well as the limits of any credit cards and overdrafts, plus any new loans being considered.

Your total gross income will include your annual salary, rental income and other extra income you receive.

Owner-occupiers are limited to borrowing six times their pre-tax income and for investors seven times.

“The rules aren’t having any real effect right now, because the banks’ internal servicing test interest rates are doing the job of naturally limiting mortgage amounts anyway.”

That’s because when you apply for a home loan banks will not only test your ability to service a mortgage on the advertised interest rate, they’ll also assess your ability to service it on the much higher “test rates” that can be several percentage points higher.

The higher the test rate, the more limitations it puts on the amount you can borrow.

“But it’s expected that as interest rates keep coming down those test rates will be less of a limitation, but then DTIs will take over and become more prevalent towards the end of the year.”

5 - FLATMATES

Ferreira says there are also extra things to think about if having a flatmate forms part of your application.

“For obvious reasons banks won't allow this for one-bedroom apartments or one-bedroom homes. They also won’t allow this for two-bedroom houses where you've only got one bathroom too.”

It can be allowed for two-bedroom, two-bathroom homes and bigger, but the total price you charge your flat mate won’t be included as income.

“They'll apportion that to about 30% of the flatmate rental income. For three-bedroom houses they’ll accept flatmate income, but they will shave that by 50%.”

“So, say for example you had a three-bedroom house with two or three bathrooms, and you were charging someone $300 a week to rent a room, they’ll only consider $150 as part of the income from that.”

Ferreira says that can be negotiated up by a broker, but if you go straight to the bank for your loan, they’ll only consider half of that as income.

Ultimately there are a lot of things to consider when applying for a mortgage and to ensure none of it catches you out, it’s important to do your research, seek the right advice and do so with plenty of lead time before trying to make a purchase.