Thinking of buying your first home? Want to refinance or have plans to invest? One of the steps weighing on your mind may be the application process. To help guide you through the home loan application process, we’ve set out some of the key things that lenders look out for when they are assessing applications. Check out our list below to see some things to consider:
Your income and work situation
A steady source of income is an important indication to a lender that you can afford to repay a loan. Not only this, but your type of employment is also an important factor for lenders.
Lenders will usually require that you have been employed in the job for between 6 to 12 months and will generally require you to provide recent payslips to prove your employment status and to make sure you earn as much as you claim to.
Part-time, casual or seasonal employees
People in these roles could face greater challenges getting a home loan, however, applications will be assessed on their merits, taking into account your overall financial position and employment history.
It has traditionally been more difficult for business owners to get a home loan, because it can be hard to provide proof of income. Plus, cash flow can be irregular. Since you do not have PAYG payslips, lenders will want to see alternative documents like Business Activity Statements, tax returns or a letter from your accountant. You will also generally need to have at least 2 years trading in the current business behind you. Depending on your situation, it may be necessary to apply for a special type of low documentation home loan. If you’re having trouble getting a loan, there are lenders who specialise in providing loans to the self-employed.
Extra sources of income
To determine your ability to service a loan, lenders will also assess additional sources of income such as:
Overtime pay – evidence from the last 2 years of payslips will be required to demonstrate you much overtime you’re likely to work.
Rental income – lenders generally accept up to 80% of the income from investment properties as income that can be counted towards a potential borrower’s net income.
Share dividends – some lenders accept a portion of share dividends as income.
Fringe benefits – things like a living allowance or car allowance may be added to your gross taxable income.
Centrelink benefits – Certain benefits such as child support, carers’ allowance, disability pension, age pension, foster care allowances and some others can be accepted as income by many lenders.
Check your credit score
In today’s tight credit environment, your credit history has become more important than ever. Before they approve a loan, lenders will take a look at your credit score. And so should you.
The score takes into account things like the size and type of your outstanding debt, the number of credit applications you’ve made, how long you’ve lived at your current address, any bankruptcies or court writs against you, and looks at your payment history – including any overdue debts, missed repayments or serious credit infringements. Your score can impact the amount you can borrow and the interest rate you’ll pay.
One thing to take note of with your credit score is to avoid sending home loan applications to lots of lenders, or making multiple credit card applications. It could reduce your credit history or worthiness, because failed or withdrawn applications may show up as credit refusals.
Look at ways to pay down your debt
Banks refer to your debt as liabilities and will look at things like credit cards, personal and car loans and HECS or other student loans as debt. Lenders will assess these closely when they are considering your ability to pay off a home loan.
Before applying for a loan, it’s important to start paying these debts down as much as possible, and not apply for any large loans or new credit cards.
When it comes to credit cards, consider cancelling any high limit credit cards you may have, or reducing the credit limit. Because when it comes to assessing your liabilities, banks look at the credit card limit – not the balance owing. If you’re not using the credit, lose it.
Your expenses and getting on top of them
Lenders will also assess your monthly expenses, sometimes right down to things like Netflix, Foxtel and Spotify payments. Some will ask for a rough estimate of your weekly or monthly expenses, while others will provide detailed calculators.
What lenders are trying to determine is your disposable income. Or, in other words, the income that doesn’t go toward bills, household necessities, groceries and discretionary spending.
Taking stock of your finances
To get on top of your expenses, it’s a good idea to look at what you spend each month and plan a budget. This exercise will not only help you identify areas where you can save, but also help you see what size home loan you can comfortably afford.
Add up how much you spend each month on everything from public transport to petrol and tolls, food and groceries to coffees and clothes. Then add any regular payments you make – mobile, Internet, pay TV, credit card, insurances, child care, utilities, AfterPay or Zip Pay, car rego and incidentals like medical expenses (divide any annual, half yearly or quarterly payments on this list by 12, 6 or 3 respectively).
This should give you a monthly spending figure. From there you can see how much you have left over for home loan repayments each month. Then, using our repayment calculator, you can figure out what your monthly repayments would be on different sized loans, to see what you can afford and how you need to budget.
Your assets and your deposit
Any savings you have, other properties or vehicles you own, shares and superannuation are all regarded as assets by a lender and will be taken into account.
Another thing that will be viewed as an asset is having a deposit saving plan. Part of your deposit can be gifts, financial windfalls or inheritances, but most lenders will want to see that at least 5% of the deposit consists of genuine savings – that is savings held in your account for at least three months, with a regular pattern of deposits. Lenders like to see this because it demonstrates that you have financial discipline.
Most lenders are now asking for a minimum deposit of 20% of the property’s purchase price. A deposit of 20% or more means you generally won’t have to pay Lender’s Mortgage Insurance (LMI) – insurance that helps protect your lender in the event you default. LMI can add thousands of dollars to the cost of your loan.
One way to get a home loan without a deposit is to have someone guarantee your home loan – usually a family member. But make sure your potential guarantor knows what they’re getting into and seeks their own financial and legal advice before they agree. Being a guarantor on a loan means the guarantor is offering their own property as security for your home loan, eliminating the need for a deposit. However, this means the guarantor’s property is at risk if you default.
Chat with our home loan specialists
Got more questions or like to apply for an ING home loan? Our home loan specialists are here to help. We can talk you through the process, calculate how much you could borrow and what your repayments would be and, should you be ready, start your application online or over the phone. Our specialists will then stay by your side all the way to settlement, while we also keep you up-to-date on your application’s progress by SMS and email, or you can track it online.
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