The most common home loan conditions

By Geraldine Grones

A new homeowner goes over the conditions of his mortgage as he signs paperwork

All lenders have a specific set of criteria by which they assess home loan applications. These criteria will determine whether or not you will be approved. Although there are a lot of lenders to choose from, and some will key in on different things, most of them will have the same requirements for borrowers. Here are many of the most common conditions banks look for in borrowers:

1. The type of borrower you are

Lenders prefer some borrowers over others in terms of the following:

Age

You must be at least 18 years of age to be approved for a home loan, however, many lenders are hesitant to lend to older borrowers – particularly those over 55. If you are an older borrower, you will need to provide a written exit plan to demonstrate your ability to repay your home loan, and lenders may only be willing to offer you a shorter loan term mortgage.

Residency

Lenders will want to know whether you are a permanent resident of Australia or not. However, if you are not a permanent resident, you are not necessarily excluded from borrowing. For instance, if you are a non-resident who is married to (or in a de facto relationship with) an Australian citizen or permanent resident, lenders will assess your application like any other resident’s application. For other circumstances, lenders may place limits on the amount you can borrow, and you may need a larger deposit. In some cases, you might even need to seek the approval of the Foreign Investment Review Board (FIRB).

Situation

Are you borrowing as an individual, a company or a trustee of a trust? Lenders allow companies and trustees to borrow, but they will require specific documentation and likely have different lending criteria in place. However, not all companies or groups are eligible for home loans. Clubs, associations and limited liability companies (LLCs) cannot be approved for home loans.

2. Your employment

Lenders will examine your work situation to determine if you have a stable source of income. The way your income is assessed will depend on your type of employment.

PAYG employee

If you are a PAYG employee – in other words, you receive a payslip with tax withheld – you should have a relatively easy time proving your income. But there are a few things lenders will examine:

  • Type of employment: Are you a full-time, part-time or casual worker? If you are a casual or seasonal employee, you could possibly face greater challenges to be approved for a home loan – but some lenders are willing to consider this type of employment on a case-by-case basis.
  • Length of employment: Lenders prefer someone who is employed in the same job for 12 months or in the same industry for two years.

Self-employed

While it is sometimes more difficult for self-employed borrowers to provide income documentation, there are lenders who specialise in providing loans to these borrowers. You will have to apply for a special type of home loan known as a low documentation (low doc) home loan. Since you do not have payslips, you will need to provide alternative documentation to prove your income, such as Business Activity Statements, tax returns or a letter for your accountant.

3. Your financial situation

Lenders will assess your financial history, habits and overall position by looking at the following factors:

Income

Lenders assess your income to determine serviceability – your ability to repay your home loan. Your income helps a lender calculate the size of a home loan payment you will likely be able to manage.

By providing your latest three payslips (if you are a PAYG employee), your lender will be able to determine your average pay amount. But even PAYG employees may have sources of income apart from their normal pay. Some of the other sources of income lenders will accept include the following:

  • Overtime pay: Evidence of overtime over the past two years will be required.
  • Rental income: Lenders generally accept up to 80% of the income from investment properties.
  • Centrelink benefits: Certain Centrelink benefits, such as child support payments, are accepted as income.
  • Fringe benefits: Lenders may accept up to 80% of any fringe benefits you receive such as a stipend, a living allowance or car allowance.
  • Share dividends: Some lenders accept a portion of share dividends as income.

Credit score

Lenders look at your credit score to assess your debt repayment history. There are different credit providers that can give you a credit score. Credit scores from credit bureau Experian range from 0 to 1,000 while those from credit bureau Equifax range from 0 to 1,200.

If you have had some rough patches in your credit history, there are still lenders who may be able to help. Some lenders specialise in helping borrowers with bad credit and offer home loans to borrowers who had defaults, writs, judgements, and even discharged bankrupts.

Expenses

Lenders assess your monthly expenses to determine your disposable income – the income that is not currently devoted to bills, household necessities, groceries and discretionary spending. To calculate this, they use one of these methods: either the Household Expenditure Method, which calculates the median spend for basic necessities and discretionary items, or the Henderson Poverty Index, which is based on a survey of Australian families and assumes a family of two adults and two children.

Assets

Assets include vehicles you own, any shares you have, your superannuation and any other properties you own.

Liabilities

Liabilities refer to any debts you have, which could include credit cards, personal loans, car loans or HECS/HELP debts. Take note that as part of the credit card debt assessment, lenders will look at the combined credit limit of all your cards rather than what you owe on them. So if you have a card you do not use, make sure to either cancel it or reduce its limit.

Deposit

If you are able to save a deposit, it will show lenders that you have financial discipline. Parts of your deposit can come from sources like gifts, financial windfalls or inheritances, but most lenders will want to see at least five percent coming from genuine savings – fund you have held in your account for at least three months. Take note that if you have less than 20% deposit, you will have to pay for lenders mortgage insurance (LMI), an insurance policy which covers your lender in the event you default on your loan. This can add thousands of dollars to the total cost of your home loan. However, there are ways to get a home loan without a deposit. One of these ways is the use of guarantors – close family members, usually parents, who offer their home as security for your home loan. This security serves as a deposit, eliminating the need for you to save one yourself. If you need more information on guarantor loans, you may find our guide helpful.

4. The amount you are borrowing

The size of your loan also affects how lenders assess your application. Here are some reminders when it comes to your loan amount:

  • The amount you wish to borrow must not exceed the loan’s maximum loan-to-value ratio (LVR). In other words, you will need to have a minimum deposit saved, with a common amount being 20% of the property’s purchase price.

  • Make sure that your proposed borrowing amount fits between the minimum and maximum loan limits imposed by the lender.

  • Use the financing for the loan for the purpose it is designed for.

5. The type of property you are buying

The property you intend to buy will be used as security for your home loan. It means that if you default on the loan, your lender will sell the property to retrieve the money they have lent you. Because of this, lenders carefully examine the type of property you are considering in terms of the following:

  • Location: Some lenders have restrictions on which postcodes they will lend in. Some rural areas, undesirable areas or areas of oversupply may face such restrictions.
  • Nature: Your lender will want to know if you are buying a house or a unit. If you are buying a unit, keep in mind that lenders often have stricter criteria for this type of property. Lenders will also want to see a property that has running water and electricity, is zoned for residential use and can be accessed without driving through someone else’s property.
  • Size: The property size is usually relevant only to units, with most lenders requiring at least 50sq.m. Meanwhile, land size is relevant to rural properties. If a property sits on more than ten hectares, some lenders will not consider it. Other lenders will consider land sizes up to 100 hectares as hobby farms.
  • Title: The property will need to have a freehold or strata title without encumbrances. If you default on your home loan, your lender will want to be able to sell the property without restrictions.

6. The reason for purchase

Last but not the least, lenders will want to know why you are purchasing the property, as it will dictate the type of loan you can get, as well as the amount you can borrow.

  • Owner-occupied: If you are buying as an owner-occupier, you are likely to face fewer restrictions and get offered a home loan with a lower interest rate.
  • Investment: While investors face tighter lending criteria and higher interest rates, you can sometimes borrow larger amounts because lenders will assume rental income will help you service your home loan.

If your situation falls outside of these conditions, do not get discouraged. Some lenders are willing to adjust their criteria and consider your application based on its merits.

More Home Loan Guide