Will your bank lend you money for a mortgage? Home loan criteria explained
As with any financial product, there are strict eligibility criteria that a home lender sets for clients before getting loan approval. This is to your advantage as well as that of the lender, as it is designed to protect everyone against the risk of default.
You shouldn’t need to be a lawyer to understand the terms and conditions of a mortgage, nor should you be a broker to determine if a lender will approve you for a mortgage.
There are simple steps potential buyers can take to ensure they are in the best financial position to apply for a home loan. Let’s explore how home loan criteria work and how you can increase your chances of getting approved for a mortgage.
What are the common home loan criteria?
Home loan eligibility criteria differ from lender to lender and are used to help determine if you are financially able to repay a home loan in Australia.
The most important thing to remember about how a lender assesses your ability to repay a loan is that they are looking for stability in your personal and financial life. The less risky you are and the less likely you are to default on the loan, the better.
Most of the standard eligibility criteria focus on your personal information, income, and expenses. This may include:
- Your age – Applicants must be 18 years or older
- Your residence – Being an Australian citizen or permanent resident is favored. Separate home loans may be available for foreign investors and those on temporary visas.
- Your income – For standard home loans, you will usually need to provide proof of income via PAYG payslips and/or a recent tax return. For self-employed applicants or small business owners who don’t have this paperwork, low-doc or alt-doc home loans may be better suited.
- your employment status – Being employed full-time for more than 12 months may seem more favorable to lenders. You can still get approved if you’re part-time or casual if you can show through your income that you can comfortably service any home loan.
- Your assets – Details of any existing assets may be requested by the lender, including properties you already own.
- Your liabilities – Details of all existing debts, such as car loans, personal loans or outstanding credit card balances, must be provided to the lender.
- Your credit score – When you apply for a home loan, the lender will carry out a thorough check of your credit history. Borrowers with good to excellent credit scores are more likely to get approved than those with bad credit.
- Your deposit – You may need to save a down payment before getting approved for a home loan. Lenders generally favor borrowers with 20% deposits, with some lenders offering home loans with deposits as low as 10%. You can find lenders willing to lend you a mortgage with deposits of less than 5%, but these are usually offered through government home-help programs for first-time home buyers.
How to know if a bank will lend you money for a mortgage
While you can’t be 100% sure if a lender will approve you for a home loan, making sure your financial situation is sound is a good way to hedge your bets.
You can improve your chances of getting approved for a home loan if you understand the criteria above and work to improve your financial situation. Before applying for a home loan, comb through your finances. Look for areas where you can reduce your expenses or increase your income and credit score.
Lenders will take your income, subtract your bills (including the maximum credit limit on your credit cards), and your regular expenses, such as take-out meals and subscriptions, to get an indication of how much you could spend on paying off your mortgage. If you have dependents, this will also take into account how much you can borrow.
Consider getting a copy of your credit history before applying for a home loan and reviewing all information. It’s not uncommon for credit bureaus to make mistakes, such as including other people’s information on your file if they’re family or have the same name as you. You may even want to improve your credit score before you apply to increase your chances of getting approved for a loan.
If you’ve just taken on a new role, it’s worth waiting a few months until you’ve left the probationary period before applying for a home loan – even if your income has increased. Lenders are looking for stability in your income and being employed in a position for at least 6 months can increase your chances of approval.
RateCity offers Australians a borrowing capacity calculator that allows you to get an estimate of how much you may be allowed to borrow. Just enter details like those listed above and you might see a low-to-high range of how much a lender might allow you to borrow.
Is your current bank more likely to lend you money than a new bank?
Many Australian home buyers may assume that their childhood bank will automatically approve them for a home loan. After all, you’ve been a loyal customer for years. However, this is a common misconception.
As each lender has their own lending criteria, there is no guarantee that your lender will approve you without checking these boxes. Additionally, you should try to compare your options to find a lender and home loan that best suits your financial situation and budget instead of sticking to a childhood bank without doing your research.
For example, some lenders specialize in offering self-employed mortgages, or you can sign up with an online lender that offers innovative financial technology. And you risk missing out on more competitive deals by not looking for home loans that better match your goals, including lower rates, lower fees, and greater flexibility.
In fact, home loan customers who stay with a bank for 25-30 years are more likely to be hit with a “loyalty tax” than those who seek more competitive offers. This is because lenders usually reserve their lowest interest rates for new customers to entice them to apply, and because interest rates often fluctuate, so better deals may be available.
If you are able to refinance your home loan and remain complacent, you could end up paying thousands of dollars in higher interest than if you refinance, or even just pick up the phone and ask for a lower interest rate.