Thinking of applying for a home loan? Lenders have a lot of eligibility criteria that you need to meet before they will lend you money. Here’s what you need to know.
Who are you?
You will need to be:
- An Australian citizen, or a permanent resident, or married to one or a temporary resident visa holder may qualify.
- Aged 18 or older
- Be financially reliable when it comes to income, spending habits and history.
Where does your money come from?
You can have a deposit ready to go and plenty of savings, but that won’t matter if your serviceability isn’t up to scratch. Serviceability looks at whether the money you are earning is enough to make your monthly loan repayments and other financial commitments without going into mortgage stress.
Here’s what to consider when you’re:
- Employed full time: That’s good, but how long have you been in the role? If more than 12 months, great. But the bank may say no if you’re in a 3 or 6 month probation period. Some banks lend while you’re on probation but may lend less than the standard 80%.
- Part time: You’re permanently employed, but your borrowing power will be less than if you were full time and you will require proof of your contractual hours.
- Casual: How many hours do you work per week? Have you been getting regular hours for more than 6 months in the one job?
- Self-employed: You will need to show consistent earnings. Lenders often require you to have been self-employed for at least 2 years, so they can compare your tax records to work out an average income.
Other income streams
Lenders may also consider:
- Rental income from investment properties (usually up to 80%)
- Share dividends (a portion)
- Fringe benefits such as living or car allowance
- Regular overtime pay (evidence required over 2 years)
Assets and liabilities
Lenders will consider your assets, such as other investment properties, shares, superannuation, your car or other items worth significant amounts
They then look at your liabilities. Do you owe money on a car, personal or student loan? These will affect your borrowing power. The biggest one is credit cards. Lenders look at the credit limits on your credit card rather than what you actually owe on them. So, you might owe $200 on a credit card with a $10,000 credit card… that’s $10,000 as a liability then they look at the monthly commitment at an average 3% of your credit limit.
Where does your money go?
Now, let’s look at your saving and spending habits.
Saving:
You’re going to need genuine savings in the bank, not just for your deposit but also to show you’re capable of setting money aside. Genuine savings is money that has been in your account for at least three months. Gifts and guarantees can be considered part of your deposit, but lenders want genuine savings of at least 5% of the value of the loan. Especially if your mortgage is going to require Lenders Mortgage Insurance (LMI).
If you are renting a property, some banks may look at your rental ledger and consider your payments as an alternative to genuine savings.
Spending:
Lenders often use the Household Expenditure Measure (HEM) when calculating your monthly expenses. Lender’s HEM is used for loan serviceability if it’s higher than your declared expenses vice versa if your expenses are higher than the lender’s HEM.
People have been shocked in recent times to be asked by lenders about individual expenses, such as shopping trips or holidays that have shown up in their transaction details.
Lenders are getting very forensic in the name of responsible lending and if they consider your application, they want to ensure that your declared expenses are sustainable.
Credit score
It’s important to be aware of your credit score or rating before applying for a loan. You can access your credit score for a fee from providers such as Equifax and Experian.
If you have payment defaults or black spots in your history, it’s best to know about these and see what action you can take to improve your credit score before attempting to borrow.
How the property you’re borrowing against might affect you
Once your personal finances are in order, consider the property you want to purchase which will be the security for your loan.
One part of a bank’s due diligence is assessing the risk the property presents to their loan. You might find the lender has a postcode restriction, which may mean special rules for the suburb your new property is in.
That bank may have a lot of properties already in that area which have LMI attached. This heightens their exposure, and they may need you to stump up a higher deposit, say 30% or more, to protect their money.
Then there’s the type of property. The bank might have more restrictions around buying a unit than a house, especially if it’s a smaller than average unit.
Also, the property should be on freehold or strata title without encumbrances. Finally, if you are buying the property as an investment property, you will face higher interest rates and lower LVR than an owner occupier.
