What the banks look for in a home loan application

Sometimes when you put your loan application into the bank it feels like you are at the mercy of the assessor who picks up your application.

With loan applications taking longer to be approved than ever before, it’s always good to know exactly what the bank looks for in an application. Below are the 5 keys things that the bank will look for in order to approve your application.

1. CHARACTER

“The first thing (in credit) is Character, before money or anything else…” J.P Morgan

Character is the first of the 5 C’c. This is where the bank looks at your credit file and your willingness to make your mortgage repayments. The bank will look at your stability as a borrower in the form of your employment history, and how long you have stayed in the same job or how often you have changed jobs. They will also look at your repayment history to see if you are making repayments to bills on time.  In short, this is where the lender will look at your reputation as a person.  If you do have a bad credit report, we may still be able to help you with a smaller lender or even help point you in the right direction to repairing your credit. It’s always recommended to tell your broker upfront if there is anything that may impact your application based on your character, so that we can put you with the right lender.

2. CAPITAL

This represents the amount of assets you have. What the bank looks for here is Assets minus liabilities.

The bank likes to see that you are able to save and accumulate wealth.  The bank tends to see it as a red flag if you are on a good income but have no savings or assets to show for your income. The bank likes to see that in the event that you lose your job you will still have a safety cushion so you can repay your mortgage.  As a mortgage broker we will go through all of your assets and liabilities to make sure that we account for everything. If we feel that your assets are a little lacking, we will ask for some details so that when we send your application into the bank we address your current asset position to paint you in the best light possible.

3. CAPACITY

The bank uses your capacity to get an idea of your ability to repay your loan. Capacity is based on your income and is calculated as a Debt to income rations (DTI) on the banks “servicing” calculator. What this services is your income in the way of salary or rental income versus your debts.

It is important to keep in mind that the bank will use your whole debt in the servicing when it comes to credit cards, so if your credit card limit is $5000 but you have only used $300 the bank will take the whole limit of $5000 as you could max out your credit card at any time. So it’s always best to keep your limit close to what you would usually spend on your card.  If your servicing ratio (DTI) is 1.00 or over you will have a better chance of getting your loan approved. This is only one aspect of the application that lenders will look for in your application.

4. COLLATERAL

The property that your loan is secured against is classified as collateral. Typically, it is of greater value to what you have borrowed from the bank. Usually you will have your deposit to contribute towards the purchase. If you have less than 20% deposit you can pay a one off Lenders Mortgage insurance fee or you can use a guarantor loan (granted you can service that). A guarantor loan works the same as a standard loan but you can use your parent’s property as security instead of a deposit helping you avoid the Lenders Mortgage insurance.

5. CONDITIONS

These refer to the financial conditions that exist at the time your application is submitted. This includes the general market conditions, your interest rate, the purpose for the loan and the repayment terms.

Looking for the right home loan? At Better Homes and Gardens^® Home Loans we are dedicated to finding the right finance solution for your individual circumstances. Through our expert advice, technology and guidance, we help you through every step of the process. To find out more about how we can help you find the right home loan for your needs, click here.

**The information provided constitutes information which is general in nature and has not taken into account any of your personal objectives, financial situation, or needs, please feel free to give our lending specialists a call to see how we can help you pay off your loan faster.