When applying for a home loan, it helps to understand how lenders assess you and your situation. Whether it’s a bank, an independent lender or a financial firm, applications are carefully assessed before they are either approved or declined. And while credit policy may differ amongst lenders, all lenders follow similar guidelines when assessing loan applications.
Your ability to repay your loan
First up, lenders will do a background check on your character – essentially your credit history – to determine your ability to repay your loan. They’ll be looking at:
• Your current and past employment and living arrangements.
• Your past loan history – both approved and declined loans.
• The length of time it took you to repay your loans and any defaults or missed payments you may have had, as well as any bad debts or judgements.
• The number of credit enquiries you’ve made and over what timeframe.
All of these factors go towards determining your character, and will be assessed using your credit file. Any past applications for any type of finance – credit card, mobile phone account, HP or personal loan – are registered in your credit file, and whenever you apply for credit, the credit assessor obtains your credit file and uses it to assess whether you have a good or bad credit rating.
You can request a copy of your credit file here [www.mycreditfile.com.au], so you’ll know up front if you have any reasons for concern.
Your security over your loan
This is the collateral you have to offer the lender as security for the loan you’re applying for. If you’re buying your first home, you’re not going to have anything with a big enough value to hold as collateral, so the lender will appraise the value of the property you’re considering buying to determine its value and ensure it’s worth the amount you want to borrow.
If you’re buying an investment property, you’d use your existing property portfolio as collateral. The type of property you already own as well as its location are both determining factors that are assessed in your loan application.
Your capacity to repay your loan
Loan serviceability is an important factor and lenders want to know you can actually afford to pay back your loan. Lenders will be looking at your income, any rental income you may receive from other investment properties, as well as your assets and liabilities.
When assessing your income, lenders will take into account how much you earn each month versus how much you spend on living expenses, personal loans and credit card debt. Applicants with a lower debt to income ratio – the measurement of debt versus income expressed as a percentage – are more likely to be successful in their loan application.
Lastly, lenders will assess your capital – the amount you’re bringing into the loan as your deposit, referred to as the Loan to Value Ratio (LVR). If you have less than a 20% deposit, your loan application will be submitted to a mortgage insurer and you may be required to pay Lenders’ Mortgage Insurance. With a 20% deposit or more – meaning an LVR of 80% or lower – credit is relatively easy to come by.
Get your ducks in a row
In order to present the very best application to a lender and secure your chances of a successful loan application, it’s vital you meet lenders’ requirements. To help you prepare your loan application, or to talk through your finance options, get in touch with a Mortgage Express broker today.