Applying for a Home Loan can be a nervous time for any prospective borrower. Whether you are hoping to buy your first home or your fifth, the process to get that final approval can be a difficult and frustrating experience. With greater regulation and the requirement to adhere to Responsible Lending Obligations, lenders are required to be more prudent than ever when assessing a new loan application. To help understand the process I have listed below the things a lender will look at to determine whether you are a suitable borrower.
One of the first boxes you need to tick off with a lender is what security you are providing to satisfy the lender’s credit policy. They look at the type of property, the property value and your intended use of the property.
There are different policies in place depending on whether you are securing your loan with a fully detached house, an apartment in the city or some vacant land. For example, if you were buying a house in the suburbs most Banks would lend you up to 95% of the property value. However, if you were buying vacant land with the intention to build a house in the future you would generally be limited to borrowing 90% of the security value.
Your intended use of the property is also subject to different rules. Finance to buy an investment property will be restricted to a maximum of 90% of the property value with most lenders.
Also, certain property types can also create challenges to obtain finance, such as large acreages, hobby farms and properties in regional areas. Some lenders will not accept these types of properties, so it is important to know up front where you can apply to give yourself the best chance at a positive outcome.
Employment stability, the security of your source of income, demonstrated consistency of earnings and a good repayment or savings history are the key indicators of an applicant’s ability to repay a loan. For the majority of applicants who have their applications declined it is the capacity to repay requirement that a lender believes has not been met to their satisfaction.
Generally, a lender will prefer an applicant who is employed full-time and has been in their role for at least six months, so not on probation with their employer. They are earning an income which is sufficient to meet the proposed loan repayments, have demonstrated a history of meeting their previous loan repayments on time or have shown a willingness to save a deposit by allocating a consistent amount into their savings. This is just about the perfect scenario for a lender assessing a loan application.
Unfortunately a lot of applicants fall into other categories which are treated differently due to their income sources. People who are self-employed, those in sales roles who earn commissions or bonuses, and casual employees may be looked at as potentially riskier borrowers, so their applications are assessed differently.
For self-employed borrowers there is a delicate balance to negotiate. For a lot of people running their own business they look to minimize the amount of tax they pay, so they maximize their expenses to reduce their taxable income. However, when applying for a loan they need to show their last two years tax returns to demonstrate that their income level is sufficient to cover the new loan repayment. They may have shown unblemished loan repayment history and have ample security to provide, but without being able to show a consistent level of income which is high enough to satisfy the lender, they will not get their application approved.
Borrowers in commission-based roles are also required to show consistency of commissions received, before a lender will consider that income as being a secure source that can be relied upon to repay the loan. Lenders have different policies applied to this income type, however most will require at least twelve months history of commission earnings before they are prepared to rely on this income.
Similarly casual employees are also generally required to have been in their roles for at least twelve months before they would be considered as a suitable borrower, as they have less employment security than those in permanent full or part-time roles.
One of the more recent changes to how lenders assess applications has been the verification of an applicant’s living expenses, and how they are accounted for to determine whether the loan is affordable. The lender requires an applicant to declare what they spend at the supermarket, on clothes, rates and utilities, transport, recreation, pets, etcetera. The lender is looking for anything that could impact negatively on the applicant’s ability to repay the loan they have applied for.
It is important to be as accurate as possible when declaring living expenses, as lenders will request account statements to verify the information. Any discrepancy between what has been declared in the application and what is illustrated in the statements will need to be addressed with the lender, which causes delays in getting a positive response.
The recent introduction of comprehensive credit reporting has given lenders much greater information on an applicant’s credit history than ever before. With most lenders now participating in comprehensive credit reporting any current loans or credit cards an applicant has will be visible to the lender. They will also be able to see the conduct on those credit facilities, so any missed or late payments in your history, particularly in the last 24 months, will be looked at negatively and will impact on your credit score, thus reducing the chances of getting an approval.
Before applying for any finance I would suggest obtaining a copy of your credit report, as you can see whether there are any old credit facilities that you thought were closed but are still open, giving you the opportunity to clean these up.
Equity represents the applicant’s investment in the transaction. Whether you are buying or refinancing you need to be able to demonstrate you have sufficient equity to be able to satisfy the lender. This category is related to the Security requirement as you need to have a minimum deposit (equity) before being considered for a loan.
In the past you generally needed to have demonstrated an ability to save a minimum 5% plus the applicable purchase costs before being considered for a loan. However these requirements have been relaxed for borrowers, particularly first home buyers and applicants who have been renting. If you have access to a deposit through other means, such as a gift from parents or an inheritance, these are also acceptable sources of deposit.
The amount of equity required will differ depending on the transaction proposed. As mentioned in the Security section if the proposed loan was to buy land or an investment property, you would need to contribute a minimum 10% deposit, so there is a greater equity requirement than buying a home to live in.
Capital represents the applicant’s net worth, the value of your assets minus the liabilities. Effectively the lender will look at personal assets like cars, savings in your bank accounts, investments such as shares and any property that you own, and deduct things like credit cards, personal loans and any other loans or credit facilities you have at the time of submitting the application. The value left is your net worth.
The lender considers this as it demonstrates an applicant’s ability to accumulate assets. It works in conjunction with other aspects mentioned earlier, such as credit history, as the willingness to repay debt should assist improve an applicant’s net worth.
An applicant’s life stage will also influence whether an applicant passes the Capital test. A young applicant would not be expected to have accumulated as many assets when compared to a middle-aged applicant. Where an older applicant does not have a significant net worth it may indicate that they spend too much and haven’t allocated any money into savings or buying other assets. This will have a negative impact on their ability to obtain finance.
It is important to emphasise that not all lender policies are the same. Different lenders may place a greater importance on some of these areas than others, which is why working with a Mortgage Broker to help guide you through the process, and ensure you are recommended to the most suitable lender to meet your individual circumstances, can give you the best opportunity to get your application approved.
At SHL Finance we are ready and willing to help you achieve your Home Loan finance goals. Please call Reece Droscher on 0478 021 757 to discuss all of your Home Loan needs.