Around 50 per cent of home loan applications are rejected by Australian lenders. If you’re part of this 50 per cent not only does this rejection bring down your credit score but also impacts your future home loan applications. By understanding the eligibility criteria for mortgage approval before applying for a home loan, you can increase the chances of your application getting over the line.
What lenders want
All lenders have a unique set of criteria that they use to judge your home loan application. There are some basic criteria, that are the same for all lenders as they establish whether you’d be able to pay back the mortgage without incurring any financial hardship. Here are some of the standard eligibility conditions that you must be aware of before applying for a home loan.
1. Personal details
The minimum age you must be to apply for a home loan in Australia is 18 years old. Lenders may have a home loan minimum age, but they don’t have maximum age eligibility for home loans. Lenders cannot discriminate between borrowers over 18 years of age as long as the borrower can establish they’re able to repay the loan. In practice, however, older borrowers often have to jump through additional hoops to get their home loan approved. They do this because they’re bound by the responsible lending criteria. This means your lender must be sure that you won’t suffer any financial hardship while repaying the loan before they decide to lend you money.
To be eligible for a home loan in Australia, you must either be:
- A citizen or permanent resident of Australia, or
- Married, or in a de facto relationship, with an Australian citizen or permanent resident.
Temporary visa holders may also apply for a mortgage if they’re allowed to work in Australia for a minimum of 12 months. You may want to speak with a mortgage broker to check your eligibility for a home loan if you’re a temporary visa holder.
2. Property details
Lenders have restrictions on the kind of property they will accept as security for a home loan. Residential properties in urbanised or non-rural areas are preferred because they’re easier to sell if you later default. The house you’re purchasing must also have a clear title and be free of encumbrances to avoid any problems in the future.
3. Income details
Lenders will assess your financial position by looking at the following factors:
Lenders assess your home loan serviceability, which is the ability to repay your home loan, by scrutinising your employment history, current income, and saving habits. Generally, PAYG employees need to provide their last three payslips and most recent tax returns for lenders to assess their income.
If you are a self-employed borrower, you’re unlikely to have any payslips to show your income. Instead, you will be asked to provide tax returns for the last two or three years. A lender may also ask for a self-certified income statement if you’ve been self-employed for less than two years. You may even provide an Accountant’s Statement as a backup to prove your ability to repay the loan.
Steady employment can improve your chances of approval considerably. It’s good to look at the following criteria before applying for a home loan:
It will help if you’ve been working with the same company for the last two years.
If you have recently switched jobs, the new role should be aligned to your previous position.
It’s better to have worked in the same role for at least six months before applying for a mortgage.
Assets and liabilities
A lender will take into account your monthly expenses to calculate the income you have to help repay the loan. Your assets include things like the number of vehicles or investment properties you own. Your additional serviceable debts, including credit cards, personal or car loans, are also taken into consideration to determine your eligibility for a home loan. If your living expenses are high, or you have less disposable income, lenders may reject your home loan application. If you’re servicing multiple debts, you may consider lowering your debt to income ratio before applying for a home loan to improve your chances of approval.
3. Credit score
Your credit score is an important figure in deciding the fate of your mortgage application. It’s used to assess your risk as a borrower—generally, the higher your credit score, the brighter your chances of home loan approval. You can check your credit score online. You can also order a copy of your credit report for free once a year from the credit reporting agencies in Australia to check what’s affecting your credit score.
If you have an average score, you can still apply for a home loan, but you might end up paying a higher interest rate or have less favourable features. Consider speaking with a mortgage broker to discuss your eligibility for a home loan in detail. When working with a broker, you’ll receive tailored home loan suggestions, expert financial advice and hand-holding during the application process.
Most lenders will ask you to have a minimum 20 per cent deposit before approving your home loan. Additionally, having some genuine savings (up to 5 per cent of the property value) in your bank account will likely boost your chances of approval.
If you don’t have a 20 per cent deposit, you might still be eligible for a home loan if you’re willing to pay for Lenders Mortgage Insurance (LMI). There are, however, certain professionals like doctors, lawyers and accountants that may get LMI waived on a home loan with only a 5 per cent deposit. Lenders see these professions as low risk due to their relatively high income and the stable nature of their employment.