Your employment and job stability are two of the most critical factors that lenders assess when you apply for a home loan. They can make or break your home-loan application – being able to show your lender that you have a steady source of income is a must for you to gain their trust and confidence.
How do lenders assess your home-loan application?
Before you try to understand how your job affects your home loan, you have to know first how your lender determines your eligibility for a mortgage.
Different lenders have different rules – you may qualify for a home loan with another lender but fail to reach the standards of another. While no definite set of criteria is universal to all lenders, they share some common factors when profiling their prospective borrowers. Here are some of the factors your lender looks for when assessing your loan:
1. Borrowing power
Your capacity to borrow depends on several things: sources of income, savings, existing debts, expenses, and investments. The ultimate goal of your lender is to see if you can shoulder adding monthly repayments to your budget while still being able to afford your essential daily needs.
It is crucial for banks to see how much mortgage repayments will take from your disposable income. Lenders have different ways to gauge this, but once they determine that the monthly repayment of the loan product you are applying for will not harm your finances, they can give your application the green light.
Your spending habits are included in this category. Lenders will look at your lifestyle and if it is within your budget. Your hobbies will be questioned, especially if you frequently spend money at casinos. This increases the risk of you struggling to meet repayments. The golden rule is to always spend within your means.
Your Mortgage previously compiled ways on how you could be sabotaging your borrowing capacity. Check out this link to know more.
2. Loan-to-value ratio (LVR)
When you apply for a home loan, lenders will only allow you to borrow a certain portion of your property's value. Lenders use LVR as a measure to assess the risk of the loan going into default --- the higher the LVR, the more likely your application will be tagged as high-risk.
As a rule of thumb, lenders only permit borrowers to take on 80% of their property's value. Take note that banks hire their own assessors to ascertain the value of the property you are planning to buy, so declaring the price of the property based on your own valuation will not cut it.
Some lenders may let you borrow more than 80% of your property's value, but you will be subject to pay for lender's mortgage insurance.
3. Credit rating
Think of your credit rating as your report card – with a single number, your lender can determine how risky you are as a borrower. Your credit score signifies your credibility in managing your finances and therefore gives your lenders a picture of how responsible you are in your financial obligations.
Credit rating providers compute your credit score based on your payment history, outstanding debt, and the length of credit history, new accounts, and types of credit used. Your credit rating is a huge factor that can sway the decision of your lender to either approve or reject your application.
How does your monthly income affect your application?
As mentioned earlier, it is vital for banks to determine your borrowing power and your salary is a huge component in computing it. The more consistent your monthly stream of income is, the higher the chance that your applications get the go-signal.
Apart from your income, your chosen bank might also consider your bonuses and incentives like your annuity income, commission, packaged salaries, and stipends. All of these can boost your borrowing power, allowing you to get competitive deals. When it comes to bonuses, lenders usually average your annual bonus income. The resulting figure will then be considered as a boost to your borrowing power.
Why is job stability important in applying for a home loan?
Banks do not care so much about how big your pay check is. What they are looking for is for job stability that will guarantee that you get a constant inflow of cash. You may have a higher-than-average monthly salary, but if you cannot prove your employment security to your lender, your chances of getting approved are slim.
For these banks, lending to someone who does not have a stable job represents a notable risk, especially if the applicant is trying to borrow over 80% of the property's price.
Some might think that employment should not be an issue anymore since banks already have the property as security. However, these lenders would not want to taint their credibility by allowing someone without a stable source of income to borrow a hefty amount of housing loan. They have the responsibility to be prudent in judging one's capacity to service a home loan. Besides, selling the property is always the last resort for these banks to recuperate from the losses should their borrowers default on their loans.
How do banks assess employment?
Your lender considers several aspects when assessing your employment. For one, they take into account the length of your time in your current job and industry. This allows them to gauge the stability of your employment. The longer you’ve been in your current company or industry, the more viable you look to your potential lender.
Lenders will also check your other sources of income, particularly if you are getting more than just a monthly salary from your employer.
In addition to your income, your employment status also matters to banks, especially if you are not a regular full-time employee.
Banks will also exert an effort to study the field you are in, looking at the financial trends amongst the people in your sector. Are people from the same industry more prone to mortgage stress? What is the rate of mortgage delinquencies amongst workers in the same industry?
How do different employment types affect your home-loan application?
If you have a full-time job, then it is already a given that you have a higher chance of getting a home loan. However, if you fall under the following employment types, you might need to exercise extreme caution and put out more effort to make sure lenders endorse your application.
1. Contract workers
There are many types of contract employment and each is treated differently by banks.
- Subcontractors: They usually work in mining and construction industries. They typically do commissioned jobs and can be employed on a pay-as-you-go (PAYG) basis or as self-employed.
- PAYG contractors: These workers are employed on a fixed term through an agency. This means that their agencies take care of the taxes. PAYG contractors are also entitled to the same benefits and payments any normal employee has.
- Company contractor: Those under this category are not considered employees. These people have their own registered business and subcontract to agencies and companies. They can also be called self-employed contractors.
- Freelancers: These are people who get paid on an output-basis. They can be employed for several projects.
Banks treat contract workers the same way they treat casual employees. Given that they are in a relatively unstable employment arrangement, banks often view these workers as high risk.
When applying, banks will require you to show not just proof of your income but also your future employment stability.
Self-employed borrowers are generally required by banks to be in the same employment position for at least two years prior to applying. Lenders will be using your previous tax returns to assess your ability to service your repayment. They will be very particular with the movement of your income, especially if there are drastic decreases over the previous years.
The industry you belong in will also have a significant effect on your home-loan application. For example, self-employed borrowers in the construction industry are viewed as riskier than those in the accounting sector.
3. Casual employees
It may be difficult for you to qualify for a home loan if you are a casual employee, since lenders will see income stability as an issue. Lenders also tend to think that when companies decide to lay off staff, casual employees are always the first in line to go.
Casual workers are often employed in the hospitality industry, schools, and hospitals. If you are a casual employee, you should have a consistent track record in the same line of work or the same industry to increase your chances of getting approved for a home loan.
4. Temp workers or agency workers
Agency or temp workers make up a significant portion of Australia's working population. They can be found in several industries but most commonly in the fields of IT, hospitality, healthcare, and mining.
These workers are hired on a temporary basis. Agency workers are employed through an intermediary body such as a recruitment agency. The employer will not pay you directly --- instead, the agency that hired you will be the one to issue you a salary or wage.
It is challenging to apply for a home loan if you are an agency worker. A temporary worker's job security is a huge factor for these lenders. Agency workers in high-demand industries might find it easier to have their loans approved but for some, providing documents that would show ongoing employment would be enough.
5. Probationary workers
There are notions that when you are new to your job, you cannot apply for a home loan. This is inaccurate, as you can still submit an application even if you are still a probationary worker.
There are probationary workers in certain professions that are usually favoured by lenders. These include teachers, medical professionals, mining industry professionals, and government employees. There is also a good chance that your application will be approved if your current job matches your track record of experience or educational background.
6. Part-time workers
A home loan is a long-term financial commitment you will carry for at least 20 years --- it is for this reason banks do not generally favour part-time workers. These people, in theory, are less stable than those with full-time jobs.
If you are a part-time worker, your home-loan application still has a chance to get the thumbs-up as long as you hit specific standards. First, you should be able to prove that you have held your part-time posts for at least a year before applying. You should also submit updated tax returns and evidence to verify your income. Usually, banks only consider half of the income you get from a part-time role. Others might not be so tough and consider your full salary.
Another way to boost your odds is to get more hours of work from your employer. This can also help you get a larger home loan. However, it will ultimately depend on the rules of your lender.
What job-related documents do you need to provide when applying?
Besides the common home-loan application requirements, you have to provide documents that can serve as evidence of your employment and monthly income. You need to furnish updated payslips, group certificates, an employment letter, and bank statements.
What can you do to get approved if you are new to your job?
There are several things you can do to ensure your application still gets approved even if you are new to your job or are about to start on a fresh role.
The first thing you can do is borrow a lower amount. By now, you should already know that banks always consider the risks you represent when assessing applications. If you are new at your job, banks might be reluctant to lend you a large amount --- it is best to evaluate your financial needs first and only borrow what you need.
Another great way to alleviate your risks to your lender is by offering security. A secured loan will be viewed favourably by lenders. You can use any other assets such as your car, high-priced items like jewellery, and even monetary accounts as security for your home loan. The only downside with this arrangement is that usually, the loan amount is tied to the value of the assets you are offering as security.
What might also help is making sure that you meet all the other minimum requirements. You should be able to give your banks sufficient supporting documentation and evidence of your assets and savings. This way, they will view you as a fit borrower.
If all else fails, maybe waiting for a month or two will give you a higher chance of getting approved. Sometimes, a little patience goes a long way when applying for a home loan.
What benefits can having a stable job give you when applying for a home loan?
Aside from the higher chances of getting approved, having a stable job and steady source of income will unlock benefits that will give you a great home-loan deal.
For instance, your lender might give you a very competitive interest rate. A small cut in interest rate can mean thousands in savings.
You can also borrow a more substantial loan amount if banks see you as a low-risk borrower. Furthermore, you can negotiate with your banks to provide you with features such as offset account, redraw facility, and the ability to change your repayment schedule.