There are a few cornerstones of residential lending criteria that are vital to you being approved for a loan.
Your income or incomes less your living expenses and commitments (such as credit cards, other loans, HECS and maintenance payments) must demonstrate your ability to afford the loan being applied for. Not all income streams are accepted and what is accepted will vary from lender to lender. In addition to this all lenders will apply a buffer on the interest rate when considering how much they will lend. What this means is that whilst you could afford the repayments based on the current interest rate, you may not be able to afford the repayments should interest rates rise. Generally lenders will assess your borrowing capacity based on an interest rate of 1.5% to 2% higher than their current rate. Click here for our instant Mortgage Affordability Calculator
As a rule the expectation is that you have been in your current permanent employment for 6 months or greater but if you have not been, then your previous employment should have been for at least 1 year in a similar role or industry. Again this varies from lender to lender and there are lenders that will accept from 1 week in the same role but this is very much based on you meeting all of the other lending criteria and showing strong affordability.
Casual employment is also considered and the expectation of time in casual employment varies from lender to lender with the minimum expectation being 3 months in your role.
For self employed borrowers, generally lenders want you to have been operating for 2 years or more and show them 2 years tax returns. There are lenders who offer flexibility with this requirement.
Conduct and Savings History
If purchasing a property, lenders will want to view your savings history or conduct on existing property loans. The point of this is giving comfort around your ability to either save or meet your obligations based on your historical savings and repayment history. It is not a complete indicator to lenders but does assist them in ascertaining your credibility as a potential borrower. Some lenders will also consider your conduct as a tenant by viewing your rental ledger or through conduct on personal & car loans by sighting your loan statements.
When you need to borrow more than 85% of the value of the property being purchased, lenders need to see savings history. Usually this is by sighting your last 3 months statements showing savings history the expectation being that you have at least 5% of the purchase price saved. There are exceptions to this rule that apply when you are receiving a gift or lump sum payment which enables you to complete a property purchase.
When refinancing your property loan, a lender will want to see 6 months statements of from your existing lender which show good conduct. You are not expected to have been a saint but regular (even if slightly late) repayments of the minimum repayment are expected. More often than not you won’t be able to borrow more than 90% of the value of your property although there can be exceptions to his rule.
Your credit history is checked every time that you apply for a credit facility. A company called VEDA hosts this information and you can get a copy of your file from www.mycreditfile.com.au . A copy of your file is available free of charge but may take a few days to be provided to you or you can pay for “same day” delivery.
Every time you apply for credit, the enquiry will be noted on your file. Should you default under a credit arrangement, this will also be noted on your file. Lets say you have a direct debit dishonoured for a car loan, this does not represent a default but not making good the repayment within 3 months can result in a default being listed on your credit report.
Lenders prefer that you have no defaults but will consider minor defaults that have reasonable explanations. There are some lenders that will consider applicants with what is known as “credit impairment” but the interest rate will be a little higher.
Security – “The Property”
Lenders will always perform some kind of valuation on the property being offered as security. The valuation report will need to confirm either the contract price or confirm a value that is sufficient enough to support the loan that you are requesting. A lender will rely on the lower of either the contract price or valuation in determining how much you can borrow against the property. As a very general rule of thumb you can borrow no more than 97% of the purchase price for a property in which you intend to live or no more than 90% of a property which you intend to rent or which you are refinancing. There are some exceptions to this rule. Click here for a free automated property valuation report on any residential property in NSW.
Most loans which are greater than 80% of the valuation received for the security property will be subject to mortgage insurance. Lenders perceive that once your lending exceeds 80% of the property’s value that they are exposed to risk in the event that you default on your loan and they have to sell the property securing your loan to recoup the monies lent. In these circumstances, they insure your loan so as to eliminate the risks to themselves. The mortgage insurance premium is paid by the borrower but it only protects the lender and not the borrower. The premium is a one off payment which is deducted from the proceeds of your loan.
On some occasions and dependent on lender, the mortgage insurers lending criteria may supercede the lenders criteria for matters such as time in current employment, credit history and savings history.
Getting Good Advice
As you can see from the above, there are many factors involved in qualifying for a loan. Just because you’ve always banked with one particular institution or someone has shared their good experience with you, that does not mean that their home loan product will be the right match for you, or you for them. You need to shop around and you need to get good non-biased advice from a finance expert. The team at Assured Lending have the experience and expertise to advise on your best options. Click here to get advice from an Assured Lending Broker today.