Taking out a home loan can be a challenge. Like a video game, there are a number of stages to successfully pass, or hurdles to jump over, before lenders hand over the golden ticket of approval.
Before all that, you will have to sit down and be honest with yourself as you dig into your financial standings to see if you meet the criteria of your preferred lender.
Yes, each lender has their own unique set of standards of who they consider to be a good mortgagor. However, while lenders will differ in the small details, the essential criteria they look for will be the same.
To a bank, the perfect borrower is one that is low risk: their prime objective is to have the loan, plus the interest, repaid in a timely fashion. If you can prove you can do that, your chances for approval will go way up ‐ but convincing a lender can take a lot of paperwork and a bit of time.
To help you prepare for this arduous process, here are the common eligibility benchmarks you need to be aware of for a seamless application:
On Personal Background
- Must be a permanent resident or a citizen of Australia
- Must be 18 years of age or older
- Have a stable employment. A steady, permanent job is one of the factors lenders do not overlook, and good employment history is a plus in their books. In order to convince the lenders that you are a decent loan candidate, you must pass the following criteria:
- You must have been working for the same company for two years or so
- If you have moved on from one job to another, it is okay as long as the new job is in line with the previous position
- If you have made a career switch, be sure to commit to it for at least six months to a year before applying to assure lenders that you are professionally and financially stable.
- You must not have more than three employers over the course of two years
- You do not have significant breaks (eg a five months vacation in Europe)
- You are not on probation
- If you are self-employed, you are required to show proof of your tax returns for the past two financial years
- Loan serviceability. This is the lender’s estimation of the borrower’s ability to repay. This is done by aggregating all of your income sources, then taking out the living expenses, the monthly mortgage repayment, and other debts, if any. Lenders need to assess whether you are fit to handle a loan commitment that will likely take years, if not decades, to pay – they want to make sure their prospective borrower can handle the burden whilst still having some money to spare.
- Credit history. Lenders like to take a peak at their prospective clients’ credit scores to have a glimpse of how good they are at paying back what they have borrowed. A high credit score shows discipline and capability in managing debt, while negative information like bankruptcy, a foreclosure, or a debt that still needs paying, can shy away lenders.
- Income. Income security is of high importance to lenders. A good employment history is one way to prove that you are financially stable and able to pay debts.
- Genuine savings. A minimum savings of 5% of the property value is required by most lenders as an evidence of a borrowers' discipline when it comes to managing their finances and liabilities. Donations, bonuses and financial gifts from parents are not considered as a genuine savings. It must come from one of their sources of income, and should show that it was generated in a span of 3-6 months.
- Deposit. Your wallet (or savings account) must contain at least 20% of the property value you are hoping to get for yourself, ready to be put down at the time of purchase. So, If you're gunning for a property worth $700,000, be ready to have $140,000 ready to go.
- 80% is the magic number – or go lower. Lenders are typically willing to finance, at most, 80% of the property purchasing price. Of course, there are some that will go up to 95%, but those are specialized loans and not typically the norm. If you are planning to ask lenders to let you borrow beyond their usual threshold, chances are you will have a much higher repayment than those with a standard home loan.
- Attractive buy. Lenders are quite picky as to what kind of property they are willing to accept as a security should a loan be granted to a borrower. They must be of residential-type (a three bedroom house and lot is a viable choice), and within the vicinity of a central business district. There is a reason for this – they want properties that are easy to sell if the borrower defaults on his/her loan. A house located far out in a rural area can take years for them to sell as compared to a house that is located within a few minutes from a city.
Keep in mind that even if you ticked all the boxes, there are still chances of getting disqualified from a home loan. There are circumstances that can still keep you from getting that loan, such as low income (a promise of promotion won’t make any good) and too many credit/loan applications can also be red flag. If you are planning to buy a property in a remote location, lenders can take a second look in your application. Properties that are intended to be used for business, like student rentals, holiday rentals, boarding houses, or apartments, can also face increased scrutiny.