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What is lending criteria? The factors that may help you get a home loan

What is lending criteria? The factors that may help you get a home loan

Banks and mortgage lenders want to make sure that they provide home loans only to borrowers who can comfortably afford the repayments. With this in mind, most home loan deals require borrowers to fulfil certain eligibility criteria in order to successfully apply.

The best rates for the best borrowers

Whenever a bank lends money, it’s taking a risk that the borrower might not pay them back. This is one of the reasons why banks and mortgage lenders charge interest and fees on their loans. The higher the risk that a borrower may not pay back the loan, the higher the interest and fees the lender may charge.

But if you can prove that you’re a low-risk borrower, a bank may feel more confident about lending to you, and may even offer you lower rates, lower fees, and/or more flexible features and benefits to help attract your business.    

What can help you qualify for a better home loan?

Aside from providing your basic identification documents (e.g. driver’s license, passport etc) and similar proof of age, identity and residency, fulfilling the following requirements may be able to help you qualify for a home loan that better suits your needs:

A high deposit of genuine savings

Most home loans require the borrower to pay a minimum deposit amount as part of the lending criteria. A common benchmark is 20 per cent of the property value, which is enough to avoid the extra cost of Lender’s Mortgage Insurance (LMI) in most cases. If you can afford to pay more than the minimum deposit amount upfront, thus reducing your Loan to Value Ratio (LVR), you may qualify for a lower interest rate on your home loan.

Keep in mind that lenders may have other requirements regarding your deposit. Many lenders prefer that most of your deposit is made up of ‘genuine savings’ – in other words, money earned from your job and put aside. While part of your deposit can still be made up of money from First Home Owner Grants, sale of assets e.g. shares, or gifts from family and friends, genuine savings help provide reassurance to a lender that you’re a responsible borrower who can manage their finances.

A steady income

It may surprise you to learn that having a high income may not be as important to a mortgage lender as having a steady and consistent income. Proving that you’ve held a steady job for a significant length of time can help give a lender greater confidence that you’ll be able to afford your mortgage repayments, now and in the future.

If you’re a freelancer, contractor, sole trader or small business owner who doesn’t receive payslips from an employer, you may not be able to easily provide the income paperwork necessary to qualify for some low-rate home loans. Some lenders may offer low-doc or alt-doc home loans for these borrowers, but these mortgage offers may have higher interest rates to help offset the higher risk to the lender.

Manageable expenses

Household expenses such as utility bills, telephone and internet, petrol, groceries, entertainment subscriptions, council rates, childcare and so on can all add up. If a significant percentage of your income is already spoken for, it may not leave much left over for your mortgage repayments. This could put you at a higher risk of ending up in mortgage stress if interest rates were to rise, or if you experienced a sudden change to your personal or financial circumstances, such as losing your job or suffering a serious injury.

Finding ways to reduce your household expenses may help to improve your chances of being approved for a home loan. You’ll need to provide proof of your income and expenses such as bank statements as part of your home loan application, so making some lifestyle changes today could make a difference to a home loan application taking place months down the track.

A respectable credit score

Your credit score measures whether or not you’re a risky borrower. If you’ve successfully applied for and repaid loans in the past, you may have good credit. But if you’ve had money troubles in the past, such as a payment default or bankruptcy, you may have bad credit.

Because home loans are secured by the value of the property being purchased, your credit score doesn’t play as large a role in determining the interest rate on your mortgage as it would when applying for other types of credit. That said, your lender will still conduct a credit check as part of processing your mortgage application. Bad credit borrowers may find it easier to be approved for a home loan if they approach a specialist lender, though there may be less choice available when it comes to interest rates, fee, features and benefits.

A record of your assets and liabilities

A mortgage lender will want to know more about what you own and what you owe when you apply for a home loan.

Valuable assets such as cars and other vehicles, fine art, jewellery, shares, cryptocurrency, and other properties may all be taken into account when calculating your potential borrowing power, as selling these assets could be an option if you ever experienced mortgage stress.

Similarly, the lender will want to know about any personal loans, car loans, credit cards and other outstanding forms of credit you have in your name. If you already owe money to other lenders, a bank may be hesitant to lend you more money to buy a property, as this could leave you unable to repay any of your loans if you experienced financial problems.

Keep in mind that if you have a credit card, the lender may be more concerned about the maximum credit limit than how much you currently have owing. This is so they can calculate if you could still afford your loan repayments in a “worst case scenario” where you’ve maxed-out your card and are being charged interest on this full amount. Reducing your maximum credit limit and/or cutting up unused credit cards could help to improve your position.

An accurate valuation

Even if you’re preapproved for a home loan, it’s not automatically guaranteed that the lender will sign off on a mortgage when you buy a property. For example, if after you’ve made an offer on a property (either at auction or privately) your lender’s valuation comes back significantly short of your purchase price, this could increase your LVR, requiring a higher interest rate, or an alternative loan.

A short valuation could occur if prices in the area have fallen dramatically, the property has major issues, you’ve overbid for the property, or there’s not enough recent sale info to compare it to. Whatever the reason, you may not receive your final loan approval until everything is sorted out.

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase. 

What are the benefits of a reverse mortgage from P&B Bank?

A reverse mortgage allows senior homeowners to unlock the equity in their homes. There is no repayment schedule, and the loan is repaid at the time of selling, if you move out or when the homeowner passes away. The interest accumulates on the outstanding amount and is added to what was initially borrowed.

Here are some benefits of applying for a P&B Bank reverse mortgage:

  • Flexibility to use the funds as desired; you can travel, pay for medical bills or undertake home improvements or use it for your regular living costs
  • A negative equity guarantee ensures the amount you have to repay never exceeds the value of your home
  • A reverse mortgage does not have a regular monthly instalment, and you can repay any amount you wish at any point during the loan tenure
  • You can choose to withdraw the loan amount as per your requirements

The P&B Bank reverse mortgage amount is based on factors like your age, location of the property, and the loan-to-value ratio (LVR).

What is the ME bank home loan approval time?

To start the process of getting a loan with ME bank, you can fill out the online application form. You’ll have to provide information about your income details, assets and liabilities, and the property you want to buy.

Generally, the pre-approval of your loan application can happen within four hours, and in some instances, it may take up to two weeks. It’s important to remember this is only conditional approval.

If you make an offer and the seller accepts it, you’ll need to wait for the cooling-off period, which varies from two to five days depending on where you live. After that, it can take between six and eight weeks after contracts have been exchanged for your application for unconditional approval to be processed.

Is a second mortgage tax deductible?

If you take out a loan to invest in a property, you can claim a tax deduction on the interest you pay as long as the property is earning income. In other words, if you rent the property for the entire year, you can claim a tax deduction for 12 months of interest payments. But, if you use the home for six months and rent it for the other six months, you can claim deduction only for 50 per cent of the interest amount.

You also get tax benefits for items that lose value over the years. But, the entire amount is not allowed as a tax deduction in the same year; instead you’ll have to claim a portion each year over a number of years. 

Additional borrowing costs, such as maintenance fees, stamp duty, offset account setting up fees, Lenders Mortgage Insurance (LMI), and establishment fees, can also be claimed as tax deductions.

Before you claim second mortgage tax deductions, it’s often worth checking with an experienced tax expert.

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

What is the ANZ home loan settlement process?

Settlement is the procedure for the official transfer of ownership between the seller and buyer. It’s often done without the seller or buyers input but between both parties’ the financial and legal representatives.

Here is how the ANZ home loan settlement process works:

  1. The solicitor or conveyancer prepares the Transfer of Land document at least two weeks before the settlement date.
  2. The signed document is registered at the state or territory land registry office.
  3. Your solicitor or conveyancer will connect with the ANZ home loan settlement contact and the seller’s solicitor or conveyancer to finalise the date, time, and place of settlement.
  4. You must deposit any applicable amount into your ANZ account three days before the settlement date.
  5. After the settlement is completed, your solicitor or conveyancer will send you a Statement of Adjustment confirming the disbursal of funds from your home loan amongst the involved parties.

How does ANZ calculate early repayment costs?

If you have a fixed interest home loan, you’ll pay ANZ home loan early exit fees for partial or full repayment of the loan amount before the end of the fixed interest rate duration. These fees are also payable if you switch to another variable or fixed-rate loan.

The ANZ mortgage early exit fees can vary and you can get an estimate from the lender before you decide to prepay the loan. However, the exact early repayment cost can be determined when you prepay the loan.

The early exit fees are calculated after considering factors like the prepayment amount, the period left before the fixed-rate duration ends, and the change in the market rates since the beginning of the fixed-rate period. The early exit fees may not be charged if you’re paying off a smaller amount. You can check with ANZ to see how much you’ll have to pay.

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

Can you borrow the deposit for a home loan?

Most lenders will want the majority of your home loan deposit to be made up of ‘genuine savings’ which is income earned from your job. While a small number of lenders may let you use a personal loan or a credit card to help cover the cost of your deposit, this may potentially cost you more in interest, and put your finances at higher risk.

If you haven’t saved a full deposit, it may be possible to effectively borrow the deposit for a mortgage with the help of a guarantor. This is usually a parent of other family member who guarantees your mortgage with the equity in their own property.

It may also be possible to borrow the money for a home loan deposit from a family member (e.g. the Bank of Mum & Dad) or a friend, provided you draw up a formal legal agreement to pay this money back, showing your mortgage lender that you’re taking responsibility.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

Can I get a home renovation loan with bad credit?

If you're looking for funds to pay for repairs or renovations to your home, but you have a low credit score, you need to carefully consider your options. If you already have a mortgage, a good starting point is to check whether you can redraw money from that. You could also consider applying for a new home loan. 

Before taking out a new loan, it’s good to note that lenders are likely to charge higher interest rates on home repair loans for bad credit customers. Alternatively, they may be willing to lend you a smaller amount than a standard loan. You may also face some challenges with getting your home renovation loan application approved. If you do run into trouble, you can speak to your lender and ask whether they would be willing to approve your application if you have a guarantor or co-signer. You should also explain the reasons behind your bad credit rating and the steps that you’re taking to improve it. 

Consulting a financial advisor or mortgage broker can help you understand your options and make the right choice.

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.