So you’ve decided to buy a property. You’ve saved a deposit, researched the local market and now you’re ready to go. But are you even eligible for a home loan?
You may know you’re “good for the money” when it comes to making repayments, but banks don’t operate that way these days.
Once upon a time, you might have visited your local branch manager in person and convinced them you were the right candidate for a loan. Perhaps the branch manager knew your family and would consider your good character when assessing a touch and go financial situation.
Not anymore. Now, you are simply a set of numbers that gets plugged into a risk assessment algorithm… if the computer says “no”, tough luck.
Who you need to be
Lenders have a lot of eligibility criteria that you need to meet before they will take a chance on you with their money.
First, you will need to be aged 18 or older, an Australian citizen, a permanent resident (or married to one), or in some cases, a temporary resident visa holder.
Then, you’ll need to be financially reliable when it comes to income, spending habits and history.
What your money needs to do
You can have a deposit, but is your serviceability up to scratch? Serviceability looks at whether the money you earn will cover your loan repayments and other financial commitments without going into mortgage stress.
– Say you’ve been employed full-time for more than 12 months. Great. But the lender may say no if you’re in a 3- or 6-month probation period. Some may say yes but may require a deposit greater than the standard 20% of the purchase price.
– Say you’re permanent part-time. That’s OK, but your borrowing power will be less than if you were full-time. And you will require proof of your contractual hours.
– And if you’re casual? Have you been getting regular hours for more than 6 months in one job? Different lenders will view casual employees differently, so it’s worth engaging your broker early to find out what your options are.
– If you’re 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, though some have become more lenient in recent times with simplified income verification for self-employed individuals.
– Other income streams lenders may consider include rent from investment properties (usually up to 80%), share dividends (a portion), fringe benefits such as living, or car allowance and regular overtime pay.
What you have and what might risk it
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? Do you have a credit card with a $10,000 limit? Even if you never use it, it counts. All of these affect your borrowing power.
Where your money needs to go
Now for the age-old money in, money out equation.
You’ll need genuine savings; 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 lenders may look at your rental ledger and consider your payments as an alternative to genuine savings.
Then there’s your spending….
Banks have become more forensic as more data becomes available to them. They may question a shopping splurge or holiday spend because they are dedicated to responsible lending and want to make sure your declared expenses are sustainable.
What’s your 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 from providers such as Equifax and Experian.
If you have payment defaults 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.
What your property needs to be and do
A lender’s due diligence includes assessing the risk the purchase property presents to their loan. A lender might have a postcode restriction, i.e. they have a
lot of properties already in that area that have LMI attached. This heightens their exposure, and they may require a higher deposit to reduce their risk.
The lender might also have more restrictions around buying a unit than a house, especially if it’s smaller than average.
Finally, if you are buying the property as an investment property, you may face higher interest rates and lower LVR than an owner occupier.