When applying for a home loan, knowing what lenders are looking for can dramatically increase your chances of being approved.
Be aware that these are not rules, just guidelines… and there can be ways to work around each of these points should you think that you may have problems in those areas!
What are lenders looking for?
Deposit
To qualify for most home loans you must be able to provide a deposit. While it is possible to qualify for a loan with as little as a 2 – 5% deposit (if you are eligible for the First Home Owners Grant and you are an Australian citizen or Permanent Resident) I would suggest that a higher deposit, say 10-20% is a better level to aim for.
A 20% deposit will negate the need for lenders mortgage insurance (saving you money), plus make the loan more attractive to lenders. This may be out of your reach, (in fact it often is for many First Home Buyers), but there other options. Some lenders will provide discounted mortgage insurance for First Home Buyers and you may also be eligible for a Family Guarantee loan (more below).
Typically, you will need to provide a minimum of 3 months bank statements showing your savings history if your loan is more than 80% of the property value.
NOTE: If you are a doctor, engineer, accountant or other professional you may be eligible for a loan up to 90% of property value without mortgage insurance. The requirements to qualify under this criteria are very specific so feel free to contact me to see if you would qualify.
Family Guarantee
If you do not have a deposit but you have a close family member in Australia who is prepared to offer their own home as security for your loan, then some banks may consider lending for your full purchase price plus costs. Note however that you must be able to pay back the loan without reliance on the income of the family member.
Other costs
In addition to the deposit, a home buyer will also need to be able to cover the other costs involved in purchasing a property, such as lenders’ mortgage insurance, government stamp duties and conveyancing fees. We will discuss these fees further next week.
Employment History
Your employment history will be considered when applying for a home loan, with most banks wanting details of your employment over the last two years.
The banks will look the most favourably on permanent full time work as a salaried employee for at least three months, though preferably 6 – 12 months. It may be possible to apply for a loan based on an employment contract and a single payslip in this instance, especially if it is in a professional field.
Casual, temporary or probationary positions or a volatile work history may affect the outcome of your application.
If you are on contract or are self employed it can be more challenging if you are just starting out in Australia. You may need to wait for 1-2 years of employment history within Australia before you can apply for finance.
Residential History
Again, lenders like to see stability in your residential history as well. If you have had to change addresses frequently, then discuss this with your lender or mortgage broker as often a reasonable explanation will help to mitigate this issue.
Credit History
The lender will conduct a credit check with a credit bureau such as Veda. Your credit history covers the last five years in Australia and shows any defaults, substantially late payments, outstanding debts and bankruptcy. This plays a major part in lenders deciding on the approval of the loan.
It is a common misconception that you should get a credit card or car loan in Australia to establish a credit history. This is not a requirement for a home loan application. Banks are looking for anything negative on the report, and a lack of credit history won’t count against you.
If you have any concerns with regards to your credit history it would be best to request a copy of your report before applying for finance. You can then discuss this with your bank or finance broker prior to lodging an application.
You can access a copy of your credit file at:
http://www.mycreditfile.com.au
Pre-approval
You have the option of applying to a lender for pre-approval for finance, especially if there is any uncertainty as to whether you will be approved. This essentially is the first stage of a full application for finance, it is just without an identified property.
Pre-approvals generally expire after 3 months, so discuss with your broker or lender whether this is appropriate for your circumstances.
Please don’t hesitate to contact me if you have any questions regarding any of these points.
