When you have a regular high income from your family-run business with your wife also contributing towards your home loan deposit, getting a home loan may seem like a piece of cake.
But more often than not, that is not the case, much like in this situation.
Summary
| Details | Description |
|---|---|
| Clients | Greg and Heidi Robinson |
| Broker | Prakash Rai |
| Purpose | To use Greg’s high income from his parents for the mortgage application by using Heidi’s aunt as a guarantor for an 80% home loan |
| Loan amount | $600,000 |
| Primary Security | $750,000 |
| Guarantor’s security | $660,000 |
| LVR | 80% |
| Interest | 3.62% |
| Problem | Even though Greg received a handsome raise, his income was not accepted as he was working in his family-run business. Heidi did not have an active ABN for two full years. Due to this, they could not get Greg’s income accepted by the lender and their mortgage insured. |
| Solution | Using Heidi’s aunt as a guarantor, the bank accepted Greg’s income since the the LVR was 80%. |
| Key takeaway | Banks may not also service the income you receive when working for a family run company. In this case, our senior mortgage broker used the aunt’s security to make the application a guarantor home loan with 80% LVR. |
The Story
Greg and Heidi Robinson are a married couple with two dependents. They are looking to buy a home, and, thus, had plans to jointly apply for a $600,000 home loan.
However, when they approached one of the major lenders to lodge their mortgage application, they were advised that they could not qualify for the loan amount they had in mind.
Undeterred, the couple approached another major lender but were advised along the same line.
Greg works at his family-partnership enterprise where he is just a salaried-employee, not a partner. His base annual earning is $90,000, thanks to the recent raise he received four months back.
Heidi, on the other hand, is self-employed and earns a yearly income of $10,000 on average. But she’s a bit short on having worked for two full years under her ABN.
The couple receives $420 in rent every week, which amounts to an annual rental appraisal of $21,840.
Additionally, they also receive $326 every fortnight from Centrelink, which amounts to $8,476 over the year.
Between the two, the couple had about $130,000 in genuine savings, which they are using as an initial deposit for their mortgage.
Their ongoing liabilities include a credit card with a balance of $1,500, and monthly expenses amount to $4,500.
But they don’t have to pay any rent and utilities as they have been living in the house provided by Greg’s employer for the past 4 years as part of his employment contract.
Although both of them had a strong, stable income, and good credit history, their combined income was not serviceable due to their individual circumstances involving their employment.
The Problem
The reasons why the couple were declined by the major lenders were as follows:
- Greg was employed by his parents. He had a regular annual income of $70,000, and recently received a raise of $20,000, making his total annual income $90,000. People employed by their family are less favoured by home loan providers. Due to the concerns over favouritism and convenient timing for the pay rise, the lenders declined to assess his income for loan serviceability.
- In Heidi’s case, it hadn’t been two complete years since she held an ABN. Additionally, her income level is not as high as her husband’s for loan purposes. Therefore, the Lender Mortgage Insurance (LMI) provider refused to approve her income for LMI purposes and her earning was insufficient for a low-doc loan.
The Solution
As soon as they were declined for the mortgage, the couple spoke to Prakash Rai, one of the specialist mortgage brokers at Home Loan Experts.
Prakash has a ton of experience with difficult cases like Greg and Heidi’s.
Prakash, dug deep into their current situation, and came to a conclusion that the couple had to use a guarantor to obtain the loan approval.
If the couple can get one of their immediate family members to guarantee their mortgage, on top of the 15% deposit they already have, they would not have to pay LMI fees.
Doing this solves the couple’s problems by:
- Allowing Greg’s income from his family-run enterprise based on his three-month salary deposit statement from the bank and an employment confirmation letter to be used to justify their ability to make timely repayments, and
- Rendering Heidi’s less than two years of operating under ABN an irrelevant issue for the loan application from mortgage insurer’s point of view.
Despite having identified the best solution for the couple, Prakash discovered that Greg’s parents didn’t have sufficient equity to back his mortgage application as guarantors.
The other option left was to use Heidi’s parents as guarantors. Unfortunately, her parents had already passed away.
Fortunately, she had an aunt, who had looked after Heidi and her brother after their parents’ demise. The aunt was like a mother-figure for both. She even backed Heidi’s brother a couple years ago as a guarantor.
Providing evidence for this and also for three months of salary statement from Greg, Prakash was able to make a case that Heidi’s aunt was the closest relative they could use a guarantor.
Furthermore, Greg was earning a regular income and could easily make repayments on the home loan.
Based on these facts, Prakash was able to get a formal approval from the first major lender that Greg and Heidi had previously approached.
Conclusion
While banks may genuinely want to help you get a mortgage, there are several factors that may keep them from doing just that.
In case of the Robinsons, there three issues:
- Greg’s income source was deemed unfeasible for serviceability purposes.
- The lender and LMI provider refused to approve the mortgage insurance as Heidi’s ABN was less than two years.
- Greg’s parents were in no position to guarantee the home loan due to insufficient equity.
These issues were resolved by using Heidi’s aunt as a guarantor.
This allowed the mortgage to be a non-insurance home loan since the applicants already had 15% of the purchase price as a deposit.
Currently, it’s rare that Australian lenders accept somebody other than the immediate family members as a home loan guarantor.
However, with a strong case that had a precedent to it, the boker was able to convince the lender to approve the loan application.
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Are you also employed by your family?
A majority of the businesses in Australia are small and run by families. So being employed by the immediate family is quite common.
However, most of the major lenders have a strict lending criteria that makes them perceive the income from this kind of employment as less favourable, particularly when an applicant receives a significant raise right ahead of applying for mortgage.
But our specialist brokers know their way around problematic circumstances like this.
If you have a similar or even more complicated issue like this, we may be able to help you find the right solution.
Please feel free to talk to one of our senior brokers by calling 1300 889 743 or by filling in our free online-assessment form today.