Obtaining finance for a home purchase can be a complicated process, and there are certain criteria that lenders require borrowers to meet before they will agree to lend money.
This document provides some information on how applications for credit are assessed, giving you a greater understanding of how you can get into a position to have your next application approved.
Lending Criteria for Home Loans
There are a number of criteria that lenders assess each application against. The main criteria are explained below.
One of the factors used to assess an application, is the lender’s judgement on the ability of the applicant(s) to make the loan repayments without experiencing financial hardship. The lender will consider a range of factors including income, expenses and other liabilities in order to determine whether or not the applicant will be able to comfortably make the loan repayments, even in the event of interest rate increases.
Loan-to-Value Ratio (LVR)
Another factor considered is the Loan to Value Ratio, or ‘LVR’. This is the amount you are planning to borrow as a percentage of the value of the property. Any savings the borrower has can be used to reduce the amount being borrowed which will in turn reduce the LVR.
The LVR is important because if the borrower is unable to repay the loan and the lender is required to repossess the security property, the lender will want to ensure that the value of the property provides sufficient equity to repay outstanding debt(s) and interest.
In many cases lenders will lend up to 90% of the value of the property, however if the LVR is higher than 80% mortgage insurance will usually be required. Mortgage insurance serves to protect the lender against the borrower being unable to repay the loan. The mortgage insurance premium is normally paid by the borrower. When mortgage insurance is involved, the application must satisfy the lending criteria of the mortgage insurer as well as the lender.
The credit history of the applicant(s) is also considered. If an applicant has previously defaulted on a loan, has missed a credit card payment, or has been declared bankrupt, this will reflect on their credit history and will be accounted for when the lender is assessing the application.
It is recommended that you talk to your Homeloans loans consultant or your preferred mortgage broker about how your credit history affects your ability to obtain finance.
Verification of financial information
Upon applying for a loan, borrowers will be required to provide verification of their financial information including proof of income from their employer, bank statements demonstrating savings, and details on other assets and liabilities. The lending institution will require such information to ensure that the applicant meets the appropriate lending criteria.
Some applicants however, may not be in a position to provide such information. For example those who are self-employed may not have the ability to provide proof of income. For these applicants a different type of loan exists – a low documentation or ‘Lo-Doc’ (Alt Doc) loan. On an Alt Doc loan the lender does not require the same level of evidentiary documentation as with a “fully verified loan”. As the loan is considered a higher risk to the lender a higher interest rate may apply and maximum LVR limits are lower than those applied to fully verified loans.
What to do if you’ve had a finance application declined
While a lender may decline an application, this doesn’t necessarily mean the customer can never borrow money from that lender at some stage in the future. It simply means that based on the applicants’ current financial situation, the proposed purpose of the loan and/or the borrowers credit history the lender is not prepared to lend at that time.
It may be that a prospective borrower needs to save more, borrow less or wait for a pay rise. If you are in a situation that you have had finance declined, talk to your Homeloans accredited loans consultant or preferred mortgage broker about your options.
Contact Homeloans today to talk to an accredited loans consultant about your financial situation.