It’s expected that home-buyers will become daunted by the complexities of the home loan application process. There are a number of regulations and laws that govern our capacity to obtain a loan. However, the process is relatively straight forward when the borrower, armed with knowledge, takes each step with clarity and caution. Here is a brief overview of the lending process that will ensure you are ready to get a good home loan deal.
Fulfilling the lenders’ criteria
Sometimes the process can seem like one hurdle after another, but you need to realise that each step attained is one step closer to approval. There are no short-cuts, and the criteria are in place to protect both the lender and the applicant.
1: Lenders are legally bound to make certain you will be able to make your mortgage repayments on time. A range of factors will be looked at, including present and past income history. Ideally, a loan applicant will show at least two years of consistent earnings in their current job, or a stable career path in the same field over a number of years. If your lender determines that your earnings are enough to cover repayments, the first hurdle of the loan application is crossed.
2: The second step is also related to income levels, and involves ascertaining whether your income is secure and ongoing. Consistent employment history is taken into consideration, and evidence of employment and wage stability will be required from applicants who have changed career paths. If you are self employed a lender will examine your past as a guideline for the present.
3: A lender will also consider the unfortunate circumstance of your becoming unemployed, injured, or adversely affected financially. Your bank or lender will need to be satisfied that if there is a loan default, they can cover their loan by selling your property. A loan-to-value ratio (LVR) of 80% of the property value is acceptable in most circumstances, and can sometimes be increased to 95% LVR by taking out lenders mortgage insurance.
4: First home buyers are scrutinised fairly strictly. Mortgage insurers will need to know how capable you are at managing and saving money. They will generally expect at least 5% of the property purchase price to be saved if you are borrowing more than 90% of the property value. Savings should not be confused with a deposit attained from sales or gifts. The only other way a property can be purchased with little or no money is by a parent offering their property as guaranteed security on the loan.
Reasons your application may not be accepted
Lenders rely on honest and transparent dealings with borrowers and there are several reasons a loan application can be rejected.
1: A lender will investigate your track record. An attempt to convince a lender based on future prospects for higher earnings will fall on deaf ears. Unfortunately, this can seem unfair on those who have been busy raising children or caring for elderly family members. Repeatedly changing jobs is another red flag to lenders. Nevertheless, some lenders will be more flexible than others and it could be worth shopping around.
2: Lenders will need to be satisfied your property has secure re-sale potential in case of loan default. For example, it’s relatively easy to sell a suburban 3 bedroom home, and the further removed your purchase choice is from that ideal the more difficult it will be to secure a loan. Lenders are more concerned about property limitations rather than potential.
3: A common reason for loan disqualification is bad credit history. Every application for credit shows on your history, and too many credit and loan applications over recent years will reflect badly and possibly result in rejection. Any past credit problems will make lenders hesitant to deal with you. Credit disputes or outstanding repayments should be cleared before you apply for a home loan: and remember your credit problems remain on record for five years.
4: Failure to disclose information relevant to your loan application will result in further investigation from the lender, and possibly the rejection of your application. Obtaining a loan by deception is often a criminal offence.
Failure is the pillar of success
Your lender will inform you of reasons for your loan application being rejected. You may then be able to re-organise or bolster finances to satisfy the lenders needs. It could be a case of asking family for some financial assistance to improve your chances. If your savings or employment history are not acceptable, don’t despair as it’s only a matter of proving yourself over a little more time.
The ideal scenario
- Steady employment history
- If self employed, stable income supported by tax returns over two years
- Permanent resident or citizen
- No credit record blemishes
- A good track record of saving
- No late payments or defaults on existing loans
Purchasing a home can be an exciting adventure, and lenders set requirements not only for their own safe-keeping, but also to ensure that the vast majority of applicants get the home they desire at a price they can afford.
You can find some of the major Australian banks’ home loan application process on the links below: