Obtaining a home loan is not something just any person can do.
Assessment processes and rules are complex and convoluted, expert advice is recommended, however as a start point here are the “5 C’s of Credit” underlying the process at all banks.
1: Character
Do you look like a person who will take responsibility in money management and will repay the loan? Your credit file and recent bank transaction accounts will be considered. Banks do not want to lend to those with (perceived or real) bad credit risk.
Tips: Do not be in arrears on debts - pay on time (especially credit cards). Do not ever go overdrawn on your savings account or overlimit on your credit card. Do not make multiple enquiries at different places for car or personal loans.
2: Capacity
Your ability to pay back the loan from your income. In bank language this is your ‘servicing capacity’. Your total income versus total expenses will be considered.
Tips: If you work for an employer earning a full-time base wage, that gross is your income. Any variation from base income is subject to different rules at different places, seek advice. Reduce your expenses leading into your home loan application – take care with living expenses and avoid any gambling. Car loans and novated leases dramatically reduce your servicing capacity. Every lender has a different calculator, expert advice is essential!
3: Collateral
The asset the bank takes as security for the loan. Not all homes are equal! Where a standard residential property is offered as security banks see a loan size up to 80% of the property value as lower risk, over 80% higher risk. This is referred to as the Loan Value Ratio (LVR).
Tips: Lower interest rates apply for a lower LVR. Special deals are available for first home buyers. Be aware purchasing other than a ‘standard suburban house’ may be treated differently.
4: Capital
Your existing overall financial position; assets and liabilities. Have you accumulated a reasonable net asset position given your age and income?
Tips: Include all your assets on your application. If you have had previous financial disasters whether caused by business loss, divorce, illness or other, let your broker know.
5: Conditions
Referencing your own situation and story, as well as economic conditions.
Tips: Every person has a story. Your broker needs to know it (the short version, not the full 3-hour film!). Banks will also take into account things outside your control when assessing applications, including general economic conditions and your job classification. For example those in secure work (such as a full time teacher) will always be assessed more leniently than a casual in a less stable industry with future employment uncertainty.
Overlaying these general ‘5 C’s of credit’, lenders are under a legal obligation to only lend to those who can prove they have the ability to repay that loan. In addition, there are multiple consumer laws and guidelines surrounding ‘responsible lending’. We saw much commentary on that coming out of the Royal Commission in 2017!
Mortgage brokers have a unique insight into those variations. Whilst loan officers working directly for one financial institution can only offer guidance into that institution’s assessment rules, brokers can help connect you to the lender best fit to serve your needs by shopping around on your behalf.
Many homeowners do not perfectly meet the 5 metrics defined above. That is where a quality broker can assist you in navigation of the process, to assist you in purchasing your dream home.
Your past decisions have brought you to where you are today, but they do not necessarily permanently define who you are. Your decisions made today will create your tomorrow. How can we help you?
Integrity Finance Australia has been serving the community since 2006. If you have any questions or want to know what your options are with your borrowing capacity or your home loan, then please email support@ifafinance.com.au, or call us on 03 9511 8883.