The Five Mortgage S Rules In Lending

There are many who claim to give you an analysis on how to conduct yourself as a competent mortgage broker.

5 important rules should be highly considerate when helping consultants and clients quickly understand how mortgage works. The rationale is quite simple, if the client has a basic gauge of how finance works, then he is much easier to deal with. If the consultant educates the client, then he will be more successful as an operator, he will win a lot more referrals and be viewed more competent than others.

Security

Serviceability

Structure

Statements

Story

What are these about and how do we apply them in the world of finance?

Attention to detail is paramount! Each rule will always cross reference to the next S rule. The 5 S’s are always interrelated.

Security

A good broker should be security based. In that, it is meant that we help you borrow against property as a main security.

Is the client buying real estate security? Are they refinancing real estate? Is the transaction a combination of refinance and purchase?

A good broker will immediately attempt to identify the security he/she is dealing with. Is it residential, commercial, industrial, franchise security? Remember, different security types will be viewed differently by a lender. A lender will lend differently against commercial security as opposed to residential security. Lender’s as a general rule of thumb will lend the most against a residential security property. This can be as high as 105%. If the client has real estate security, or a franchise business we have a transaction ready for processing.

Serviceability

Otherwise known as ‘The Law of Affordability’.

Can the client afford the debt? This will include the overall debt exposure the client has. A serviceability analysis on the client’s affordability position will generally be conducted - the common sense rule. This is to ensure that the client can afford the debt/s.

Remember, different lenders do it differently, so a client’s affordability position can/could vary between different lenders. You will need to be attuned to different lender requirements.

As a general rule of thumb, lenders will put a buffer in the serviceability module that will be conducted. For example, lenders will assess the debt at a higher interest rate to allow for fluctuations in interest rates now and in the future.

A verified serviceability statement can be made by way of providing income documents. This can/will include payslip’s, group certificates, employment letters from employers, tax returns, profit and loss statements, cash flow forecasts, and rental statements. Anyone of these documents can be used to verify income. In some instances it could include all these documents and others.

Also, serviceability can be made by way of a client making an income declaration (non verified). This is otherwise known as a Low Doc (low documentation) declaration. Even when a client makes a Low Doc declaration, the lender takes the income stated on the declaration and runs this figure through a serviceability calculation. All low doc loans still go through a serviceability analysis. Hence a pass or fail analysis is produced. That is the client must still be able to afford the debt.

Nonetheless, a client can take on a No Doc loan. In this case, no income statements in any form are to be provided. All that is required is a declaration of affordability. That is the client signs a statement stating that he/she can afford the debt without incurring financial hardship. No income figure needs to be stated.

You should NOT submit a loan without conducting a serviceability analysis or applying the common sense rule. There is duty of care towards the client, and the client should be made aware if he/she is violating the law of affordability.

Structure

Note, different lenders do their assessments differently. They view structure differently.

The structure of your clients loan is extremely important. This can involve identifying the difference between a coded loan and a non coded loan (owner occupied or investment) as different laws can govern different loans.

This can also involve knowing how different products are assessed with different lenders.

This can also involve the way the loan is viewed in terms of serviceability. So as an example, an investment loan has a higher borrowing capacity than a home loan, as some lenders factor in negative gearing when assessing the loan as the loan can/could be tax deductible. Also the lender factors in rental income if it is applicable. Rent is an income.

In some cases you will find a loan being assessed more stringently with one lender as opposed to another lender. So for example, Bank A assesses a line of credit at 25 year term on a principle and interest basis. With Bank B, the same loan is assessed without a term on an interest only basis. Therefore Bank B is a more generous lender for lines of credit. However, Bank A will factor in negative gearing benefits in its calculator. With Bank B this is not possible. So one benefit can supersede another benefit. Knowing this variance in structure and how to balance your client’s position to achieve maximum benefit is very important.

As another example, some lenders will not assess a 4 or 5 year fixed rate at a higher rate. This is important as it could increase the borrowing capacity for a client as the assessment rate used in conducting serviceability is not loaded.

Statements

The documentation required in order to allow a loan to be processed. Make sure you have compiled all the documents required in order to allow you to make the judgment that the loan application is ready for processing.

Your application for finance is a statement. The income documents you supply are statements. The ID you supply for the client are statements. The loan statements being supplied for a refinance are statements. There are many aspects to the statements aspect of the five S rule. You must be able to decipher what is required on the spot when dealing with the client.

The documentation required to process loans with different lenders for the same scenario can vary between lenders. As a general rule, you must supply a serviceability sheet with every application with the exemption of No Doc loans. You must supply income statements in terms of payslip’s, group certificates, tax returns, income declarations etc. You must supply 100 points ID.

Peruse all documents before submitting, and make sure the documents are in alignment with the designated structure. So this would mean that income documents would need to be aligned with the serviceability being conducted.

With a refinance, make sure you have provided 6 months previous lenders loan statements for debts being refinanced. See the conduct of these statements! Are they satisfactory? Enquire as to the conduct why there are any delinquencies if there are any?

Provide some type of evidence of the property in question. If it’s a refinance, get a copy of a council rate. This will show who owns the property and will also give the title details of the mentioned property. If the transaction is a purchase, you would need a front page of contract, and/or a copy of a transfer.

Story

Remember to explain the whole transaction.

This is the sell and/or explanation of the deal. This is your opportunity to sell the client to the lender. Remember, the lender does not know your client, nor do they have personal relationship with them. Stick to the facts. Learn as much as you can from the client about themselves and their situation. Translate this information into relevant facts pertaining to the application. As mush as possible, be detailed, but refrain from using emotive language.

As a broker, if you can interrelate these 5 five rules, you will be successful.