Multiple credit inquiries can cause your loan application to be rejected
Lenders have a regulated prudential responsibility to conduct inquiries and assess applications to ensure that the borrower is sound. However they also have a basic business responsibility to look for borrowers who are stable with a potential for a long term relationship. After all the lenders make a gross margin of probably less than 2 percent per annum on your home loan – the actual profit margin will be only a fraction of this and so a borrower who shows a track record of moving from one lender to another, chasing the lowest rate is not a particularly attractive proposition. As a result lenders who use Automated Credit Scoring will penalise this type of applicant.
Then the previous credit reporting system allowed for the collection of negative data only. This meant that when you applied for credit and this includes home loans, domestic credit such as store cards, credit cards and even mobile phones – your application results in a credit inquiry on your credit report (CRA). However the only other information that was recorded is company directorships and most importantly credit defaults ie: where you have failed to make a repayment and any subsequent court ruling such as bankruptcy.
As a result your CRA provided very little information to lenders and therefore they were forced to take a conservative view to what was there. Obviously any defaults are very serious and for many loan applications will mean immediate rejection. Many people are surprised to learn than even two unpaid telco defaults if the total is greater than $500 can mean rejection by almost all mainstream lenders.
As a result one of the most important items that creates problems is simply the number of credit inquiries ie: when you make a loan application the lender makes an inquiry on your credit report. Other lenders then see this inquiry and because there is no further information the lender assumes that you either obtained finance ( which had better be disclosed in your application ) and failing that it is assumed that your application for that finance was rejected.
If there are only one or two inquiries over the past two years the new lender will ask for an explanation however if the number of inquiries are up around six in the past two or three years then many lenders who use ‘Automated Credit Scoring’
Under changes to the privacy laws that came into effect March 2014 restrictions on CRA information will be eased, allowing for new items to be recorded:
- Type of credit account opened
- Date on which account was opened/closed
- Current limit on each open credit account
- 24 months account repayment history
At this stage it is unclear as to how the lenders will use this and whether they will discontinue penalising too many inquiries.
Your mortgage broker will raise this with you and may suggest that you obtain a free copy of your CRA in order to ascertain what if any horrors lurk there. It is best to know in advance and openly discuss any issues with the lender’s credit section before making an application. After all a rejected application just compounds the damage and results in a lot of work for us for no pay!