What is lending criteria? The factors that may impact eligibility criteria

Banks and mortgage lenders want to provide home loans to borrowers who can comfortably afford the repayments. This is why Australian mortgage lenders require borrowers to fulfil certain eligibility criteria to gain loan approval.

If you’re applying for a home loan, you’ll want to ensure that you can fulfil its lending criteria. If you can’t, you risk your home loan application being rejected. This is for your protection as well as the bank’s, so you don’t take on a debt you cannot comfortably repay. 

Let’s explore the standard lending criteria of most banks and lenders in Australia, and what you can do to boost your chances of approval: 

What is lending criteria and how does it impact a mortgage application?

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. 

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

Different banks and mortgage lenders have different home loan eligibility criteria, so it’s important to carefully compare different offers before you apply. That said, some criteria is commonly required across many different lenders.

Standard lending criteria for home loans

How can you boost your chances of approval?

Fulfilling the following requirements may help you to boost your application and improve your chances of meeting the home loan’s lending criteria: 

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% 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. Showcasing genuine savings in your bank or savings account will likely boost your chances of approval. 

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 (ideally longer than probation, e.g. three to six months) can help a lender be confident 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 increased risk to the lender.

Manageable expenses

Household expenses, such as utility bills, petrol, groceries, entertainment subscriptions, council rates, childcare and more, 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. 

At least three months before you apply for a home loan, consider finding ways to reduce your household expenses. Making some lifestyle changes today and cutting out (for example) entertainment spending, online shopping and takeaway meals could make a difference to your home loan application, as this extra spending won’t appear on your bank statements. 

A high credit score

Your credit score shows lenders whether 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.

Your lender will conduct a credit check as part of processing your mortgage application. Borrowers with good to excellent credit scores may be more likely to be approved. Before you apply for a home loan:

1. Check that your credit score is where you think it is; and
2. Boost your credit score if there is room for improvement.

An accurate valuation

Even if you’re pre-approved for a home loan, a full approval is not automatically guaranteed. For example, if you make an offer on a property, and your lender’s valuation comes back significantly short of your purchase price, this could disqualify you from a home loan. This is because a higher purchase price may 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 data available to accurately compare. Whatever the reason, you may not receive your final loan approval until everything is sorted out. 

If you’re not sure whether or not you’ll meet a bank or lender’s eligibility criteria, it may be worth speaking to a mortgage broker. Brokers may offer expert home loan advice and assistance with your specific mortgage application and financial situation, without costing you a cent. 

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