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

Alex Ritchie avatar
Alex Ritchie
- 7 min read
What is lending criteria? The factors that may impact eligibility criteria

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

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

Let’s explore the standard lending criteria most banks and lenders have 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, and may even offer you lower rates, lower fees, and/or more flexible features and benefits to help attract your business.    

Standard lending criteria for home loans

Criteria

About

Personal information

Includes:

  • Applicants must be over 18.
  • Residency - you must either be a citizen or permanent resident of Australia, or married/in a de facto relationship with an Australian citizen or permanent resident.
  • Identification documentation - drivers license, current passport etc. 

Property detail

Lenders have restrictions on the kind of property they will accept 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.

Income details

Lenders require eligible borrowers to be in a stable financial position. This is assessed by looking at your income, expenses, employment status and liabilities.

  • Income - PAYG employees may need to provide their last three payslips and most recent tax returns for lenders to prove their income is enough to repay a mortgage.
  • Employment status - Steady employment can improve your chances of approval. Being employed full-time for 12 months is considered ideal. 
  • Bank statements - You may need to provide three months worth of bank statements. Your monthly expenses will be assessed to calculate the income you have to help repay the loan. 
  • Liabilities - All debts, from credit cards to HECS/HELP, are taken into consideration as part of testing your borrowing power. If your living expenses are high, or you have less disposable income, lenders may reject your home loan application. 

Credit score

Lending criteria will typically stipulate that applicants have a good to excellent credit score and healthy credit history. Generally speaking, the higher your credit score, the greater your chances of home loan approval. 

Deposit

Lenders will require you to pay a deposit to help secure the home loan. Lending criteria may restrict the minimum deposit approved to be 5-10%. Generally, lenders prefer applicants to have a deposit of 20%. 


Additionally, showcasing genuine savings in your bank or savings account will likely boost your chances of approval. 

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 lending criteria for a home loan. 

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.

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, say, three to six months) 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, 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. This may help to improve your chances of being approved for a home loan as frivolous spending, such as regular online shopping and takeaway meals, will not show up in your bank statements. 

Making some lifestyle changes today and cutting out on entertainment spending could make a difference to a home loan application.

A high credit score

Your credit score helps lenders to measure 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.

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, it’s not automatically guaranteed that you will qualify for full approval. For example, if after you’ve made 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 info to compare it to. 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. Bokers 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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Product database updated 21 Jul, 2024

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