5 common mistakes with living expense assessments
Living expense assessments can be tricky. They’re a common cause of loan applications being rejected by lenders, so it’s important to get it right the first time. The lenders have zero tolerance for loan applications submitted with a living expense calculation that’s lower than the HEM and they’re now recording and reporting back the data you provide to them.
Here are 5 common mistakes brokers are making with living expense assessments.
- Savings discrepancies. If a client says their living expenses are $1,000 and they are earning $4,000 in net income, then they should be saving $3,000 a month. It’s a simple step to verify how much they are saving by checking their bank transaction statements. If they are not saving the $3000, you need to find out where the money is being spent.
- Adding up the expenses incorrectly. Counting an expense twice or not counting it at all is a common problem that’s usually caused by rushing through your admin tasks. Counting something twice and increasing the living expenses could cause your client’s application to fail the serviceability requirements, so it’s important to get it right.
- Missing expenses. It’s easy for a client to overlook a regular expense like health insurance, school fees, gym membership or the costs of car registration and maintenance. These can be innocent mistakes, but they can have consequences and they can be time consuming to correct. Be sure to check your customer’s bank transaction statements carefully. Talk to them about their lifestyle and spending habits to find out where they spend their cash if you can’t spot expenditures on the transaction statement.
- Discounting rent payments. If your customer is planning on living in the home they purchase, existing rent payments do not need to be included in the living expense assessment. Be sure to check the situation carefully.
- Guesstimating. Some clients simply have no idea what they spend and what they might need to spend in future. It’s your job to help them work it out. Use your experience and knowledge to help your clients fully understand their financial situation and be sure to make an accurate assessment, not a guesstimate!
Want to find out more?
The Compliance Team produced a great article giving you a step-by-step guide to living expense assessments earlier this year. Simply read it here for more information on ensuring you are capturing your customer’s living expenses correctly.
If you have any questions, your local Compliance Support Managers are here to help. Get in touch by clicking on your help icon in Mercury and selecting ‘Compliance’ or email us directly at firstname.lastname@example.org.