Ever wondered how banks assess home loan applications? All lenders have their own policies about assessing and approving loans. However, there are certain themes that lenders use when assessing and deciding if your loan will be approved. Broadly these fall under the four Cs.
This may seem obvious, but can you make the loan repayments? Interest rates are at historic lows now but will eventually rise, the lenders want to know if you can still make the repayment when interest rates rise. Different lenders use different higher level interest rates at which they ‘test’ if you could make repayments at, for if rates increase. They use these inflated rates to calculate your ability to repay your loan in the future. If under these inflated interest rate scenarios you would be unable to repay the loan, you will have a hard time getting your loan application approved.
Your financial character is important to the lenders. So, are you reliable financially, and how is that measured? Lenders often judge future likely behavior on past behavior. So, in the past did you make all of your loan payments on time, or were you late or did you not pay at all? How do lenders find out this information you may ask? In Australia there are four credit reporting organizations Veda Advantage, Experian, Dunn & Bradstreet and the Tasmanian Collection Service. These collect information about you including your full name, address, employers, court judgments, bankruptcy history, defaults, debt repayment history and credit inquiries, etc. If you have ever applied for credit you will have a credit file. By law, credit-reporting organizations must provide you with a copy of your credit file for free once per year or if you have been rejected for credit.
Other aspects of financial character include employment stability and home/address stability. Where your employment changed but was still in the same industry, this still may be seen as stable, especially if moves were for promotions. If you also moved home for work/promotions this can also be seen as positive. However, if you have moved around from place to place and job/industry to job/industry you may make some loan assessors nervous.
This is a big one! How much asset value do you have in the deal? The more capital/money (or equity) you have to contribute to the deal/asset (in terms of % of its worth), the more confidence the lender has that you will not fail to repay the loan (and lose your contribution to the deal). The greater the proportion of the capital that you have in the asset secured against the loan, the lower the risk to the lender in the event that you default and they need to repossess and sell the asset. Many loan approval problems, like bad credit history, can be overcome if the capital contributed to the deal is large enough.
Touched on under Capital, the greater the security/asset value that the lender can recover in order to mitigate its losses if you don’t pay, the more likely they will lend to you. However, all assets are not equal. Some assets are easier to sell quickly than others. For instance, lenders rate residential property in the capital cities as easier to sell quickly than property in rural areas. Residential houses are easier to sell quickly than student accommodation (this may have something to do with the market for residential property including owner-occupiers and investors but student accommodation being predominantly purchased by investors). There are numerous other categories each with its own risk profile. The riskier the asset, generally the greater the proportion of capital that is needed before a loan can be secured.
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If you want to maximize the chance of your loan being approved or explore your options please contact a mortgage broker.
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