When a bank peruses through some of the papers you’ve collated for their eyes only, gaining ticks in all the right boxes depends on whether the bank believes you hold the financial power and ability to pay off the loan you’ve requested.
Many low-income earners don’t even apply for a loan, too often swayed by the belief that they have to have a high income in order to enter into a home mortgage – which is understandable, as the more money borrowed from the bank, the higher monthly repayments will be.
Those who struggle most with such a predicament are singles, households receiving one income, part-time workers and students. Although a challenge to achieve, it’s still possible for low-income earners to obtain a home-loan, even despite their disadvantage when compared to couples who can often merge their pay cheques.
Sometimes this comes down to focusing on certain aspects of your home loan application and making them stand out. Here are a few important things to know about how a lender assesses you for a loan and what you can do to help gain their seal of approval.
‘Income’ runs deeper than a pay cheque
A lender ultimately looks at the figures you bring in – and this isn’t limited to your monthly pay cheque. Your inauguration into the mortgage sphere comes about from other proofs of income also, such as Centrelink payments, child support, various pensions, and moreover any stream of money that proves you have the financial capacity to pay a loan and simultaneously tend to life’s other expenses.
This means your outgoing income will be just as important to a lender’s criteria. A lender needs to affirm that you have the financial breathing space to tend to a loan, and if you can show instances where certain expenses have been cut back on, it will only confirm to them that you are disposed to extra income, which can then be put towards loan repayments. Paying off any outstanding debts or credit-cards falls into this category also.
Power comes with saving first
There is no better way to impress a lender than to have at least 20% of a deposit saved. Other than giving the bank added peace of mind, a deposit will help you avoid Lender’s Mortgage Insurance (LMI), which is required if you borrow more than 80% of a property’s value, and you may also have room to obtain a more competitive interest rate. The lower your interest rate, the less your monthly repayments will be.
Holding a deposit also means you will likely need to borrow less from the lender, which is a better playing field for low-income earners, as the likelihood of being approved for a loan is increased when dealing with smaller loaned amounts.
Join forces with someone
If you’re unable to save for a deposit, which can at times entail a large amount of money to be saved depending on the property type, there is the option to partner with someone through a joint venture.
A property joint venture involves teaming with a like-minded individual who wants to enter into the market also, and pooling both your financial and other resources together to achieve a common buying in or investment goal.
Whilst this avenue means both parties will equally share the deposit and monthly loan repayments, they will also equally share the risks and potential losses involved. Therefore, it’s important to seek legal and professional advice on property joint ventures before signing into one. And at the end of the day, it’s better to own half a property than no property at all!
Get a guarantor on board
A guarantor is someone who is included in the legal binding of the loan, and acts as reassurance to the bank that if you forfeit on the loan, or are unable to continue paying it off as a result of your low income situation, the guarantor will be able to step in.
Ideally, the guarantor will need to be rock-solid in terms of proving to the bank that they can provide for the deposit and make payments for the life of the loan, if the occasion calls for it. Sometimes banks may only request a guarantor for the deposit, and other times for the total loan length of the loan.
Gain a pre-approval earlier
You may not be eligible to purchase in a specific suburb, or a certain property type because the market price is just too high for you to be approved for a loan, but this doesn’t mean there aren’t other options out there. But the only way to start scoping the best areas and properties for you, based on your income and living expenses, is to get a home-loan pre-approval done as early as possible.
A pre-approval will also give you a better idea of how much your deposit will likely be, and the earlier you can start saving for that, the better your position will be.
Proving to the bank that you are able to pay off a loan – including some of the other fees entailed in the application and account keeping process – can be a challenge at times for low-income earners. But it’s still possible, especially when saving for a deposit and eliminating all other debts.