If you’re an Australian looking to buy a home or refinance your existing mortgage, one of the biggest hurdles is getting approved for a home loan. Lenders take on significant risk when lending hundreds of thousands of dollars, so they evaluate applicants very carefully. Understanding how lenders assess your creditworthiness can help put you in the best position to get approved.
Credit History and Credit Score
Your credit report and credit score give lenders a snapshot of your history managing debt and making payments on time. Lenders want to see a track record of consistent on-time payments without any bankruptcies, defaults, or other derogatory marks. Higher credit scores demonstrate lower risk. Most Australian lenders use credit scores from Equifax, Experian or Dun & Bradstreet.
Income and Employment
Steady employment and income are crucial for convincing lenders you can repay the mortgage long-term. Lenders typically want to see at least 6-12 months in the same job. They’ll ask for payslips, tax returns, and employment details. For self-employed borrowers, providing solid documentation like tax returns and profit/loss statements is essential.
Assets, Debts and Liabilities
Lenders calculate your debt-to-income ratio by looking at your monthly debt payments compared to your gross monthly income. High debt levels can make it harder to qualify. They’ll also examine your assets like savings, cars, investments, etc. Having financial reserves shows you can still pay if life circumstances change.
Deposit and Equity
Australian lenders typically require at least a 20% home deposit to avoid paying Lender’s Mortgage Insurance. If refinancing, having more than 20% equity in your current property works in your favor. Larger deposits and equity positions signal you’re a lower-risk borrower.
Living Expenses
Many lenders now scrutinize your regular living expenses like groceries, utilities, transportation, and entertainment. Providing recent bank statements and estimating costs reasonably is recommended. High expenses relative to income can make loan approval tougher.
Loan Purpose and Property
Lenders perceive loans for investment properties or vacant land as riskier than loans for owner-occupied homes. They’ll examine the property’s details like age, condition, location and valuation. Run-down, remote or specialized properties are less attractive collateral.
By understanding these key criteria lenders use to evaluate home loan applicants, you can take steps like boosting your deposit, paying down debts, and cleaning up your credit to make yourself look as robust as possible. A little preparation goes a long way in getting over the approval hurdle. Get connected with our “Your Finance Coach” team to get expert advice today.
