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Banks have a set of criteria by which they assess home loan applications. These criteria determine whether or not you'll be approved. Unfortunately for you, individual lenders don't often make these policies public, which means there can be some guesswork involved in knowing whether or not your application is likely to be approved.
However, there is a general framework most lenders lean on. Most lenders will ask the following questions when assessing your application – and being aware in advance, can help you tailor your application to suit their lending criteria.
The first detail banks will look at is exactly what sort of borrower you are. Lenders definitely have preferred borrowers, and there are some borrowers they're unlikely to approve.
You have to be at least 18 years of age in order to be approved for a home loan. In general, many banks are hesitant to lend to older borrowers, because they're worried about your income and capacity to repay the loan when you retire.
While there aren't exceptions for borrowers over 18, there are exceptions for borrowers over the age of 55. If you're an older borrower, you may have to do a bit of extra work to see your application approved. You'll have to provide a written exit plan to demonstrate your ability to repay your home loan, and lenders may only be willing to offer you a shorter loan term.
A lender will want to know whether or not you're a permanent resident of Australia. However, if you're not a permanent resident you're not necessarily excluded from borrowing.
If you're a non-resident who is the spouse or de facto partner of an Australian citizen, Australian permanent resident or New Zealand citizen, lenders will assess your application like any other resident's application.
If you're a non-resident, lenders may place limits on the amount you can borrow. You may need a larger deposit. In some cases, you may also have to seek approval from the Foreign Investment Review Board.
Learn more about investing in property as a non-resident
A lender will want to know if you're borrowing as an individual or a collective. In other words, you may be sourcing a home loan as a company or as the trustee of a trust. Lenders will allow companies and trustees to borrow, but will require specific documentation and are likely to have different lending criteria in place.
However, not all companies or groups are eligible for home loans. Clubs and associations cannot be approved for home loans, and neither can limited liability companies (LLCs).
Lenders will need to examine your work situation to determine that you have a steady source of income. The way your income is assessed will depend on your type of employment.
If you're a PAYG employee, meaning you receive a payslip with tax withheld, you should have a relatively easy time proving your income. However, there are a few things lenders will scrutinise.
If you're self-employed, you won't have PAYG payslips to prove your income. Instead, a lender will need alternative documentation to demonstrate your income. You'll have to apply for a special type of home loan known as a low documentation, or low doc, home loan.
You'll usually be asked to provide Business Activity Statements, tax returns or a letter for your accountant. While it's sometimes more difficult for self-employed borrowers to provide income documentation, there are lenders who specialise in providing loans to these borrowers.
Home loans for self-employed borrowers
The next thing lenders will want is a detailed view of your financial history, habits and overall position. In order to get that, they'll look at a few different factors.
Lenders will want to know that you have a steady source of income. As stated before, this is easy to demonstrate if you're a PAYG employee. You'll just provide your last three payslips so your lender can determine your average pay amount.
But even PAYG employees may have sources of income apart from their normal pay. Some of these will be accepted by lenders, and some won't. Some of the sources of income lenders will accept include:
Some lenders may accept other alternative forms of income on a case-by-case basis. Likewise, if you're self-employed you'll use different documents to demonstrate your income, as mentioned above.
Lenders assess your income to determine serviceability, or your ability to repay your home loan. Your income helps a lender calculate the size of a home loan payment you're likely to be able to manage.
Lenders will also want to look at your debt repayment history. They do this by looking at your credit history and credit score.
There are a few different credit providers that can give you a credit score. Credit scores from bureau Experian range from 0 to 1,000 and credit scores from credit bureau Equifax range from 0 to 1,200. You can check your credit score and full credit report for free with finder here.
If you have had some rough patches in your credit history, there are still lenders who may be able to help. Some lenders specialise in helping borrowers with bad credit and offer home loans to borrowers who've had defaults, writs, judgements and even discharged bankrupts.
Home loans for bad credit borrowers
Lenders will assess your monthly expenses to determine your disposable income, or the income that's not currently devoted to bills, household necessities, groceries and discretionary spending. To calculate this, lenders tend to use one of two methods, either the Household Expenditure Method or the Henderson Poverty Index. The Household Expenditure Method calculates the median spend for basics necessities and discretionary items, while the Henderson Poverty Index is based on a survey of Australian families and assumes a family of two adults and two children.
You can head here to find out more about how your living expenses are calculated.
A lender will also take into account any assets you have. This includes vehicles you own, any shares you have, your superannuation and any other properties you might own.
Your liabilities include any debts you might have. This could be credit cards, personal loans, car loans or HECS or HELP debts.
How HECS and HELP debts affect your application
When assessing your credit card debt, it's important to note that lenders will look at the combined credit limit of all your cards rather than what you owe on them. So if you have a card you don't use, it pays to cancel it or reduce the limit.
Lenders want to see that you've saved a deposit because it demonstrates your financial discipline. You will require at least a 5% deposit, except in some special circumstances.
If you have less than a 20% deposit, you'll have to pay for lenders mortgage insurance (LMI), an insurance policy that covers your lender in the event you default. This expense can add tens of thousands of dollars to the cost of your home loan.
Parts of your deposit can come from sources like gifts, financial windfalls or inheritances, but most lenders will want to see at least 5% coming from genuine savings. Genuine savings are funds you've held in your account for at least three months.
However, there are ways to get a home loan without a deposit. One way is to use a guarantor.
A guarantor is a close family member, usually a parent, who offers their home as security for your home loan. This security serves as a deposit, eliminating the need for you to save one yourself. However, this means your parents' home is at risk should you default on your home loan.
More about home loan guarantors
There is also one Australian lender that offers a home loan using a parental loan as a deposit. The parental loan is then managed and repaid through the lender.
However, in all other cases you'll need to save a deposit yourself, and you'll need at least 5%.
The type of home loan and the size of the loan amount also affect how the lender assesses you. This includes:
Determining your borrowing power with an estimate calculator can also give you a better idea of how much you can borrow.
Next, lenders will want to know the kind of property you're buying. The property will be used as security for the home loan, meaning that if you default on the home loan, your lender will sell the property to recoup the money they've lent you. Because of this, banks scrutinise the type of property you're considering.
Lastly, a lender will want to know why you're purchasing the property. The reason you're buying your property will dictate the type of loan you're eligible for, and often the amount you can borrow.
How to increase your borrowing power
After entering your details a mortgage broker from Aussie will call you. They will discuss your situation and help you find a suitable loan.
The Adviser’s number 1 placed mortgage broker 8 years running (2013-2020)
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If I have owned already 2 properties(houses)with zero home loan overseas (total worth 250000 Australian dollars may be more now, but currently I am a full-time student and not employed, am I eligible to get a home loan?
Hi Ee,
Thanks for your inquiry.
Your eligibility for a loan would depend on the lender’s requirements and discretion. You may check out our article written above on this page for guidelines regarding the criteria for home loans.
I hope this helps.
Kind regards,
Bella
Hi. How does the lenders view the existing home loan balance. Doest it impact the borrowing power.? Monthly income is sufficent to repay the loan instalment amount and monthly expenses.. Thanks
Hi Fred,
Thanks for getting in touch with finder.
Lenders will want is a detailed view of your financial history, habits and overall position. In order to get that, they’ll look at a few different factors. This may include any existing home loan balance. A lender can use different approach or method to determine your ability to pay them back even if you have a current home loan.
The best way to determine your eligibility is still to directly get in touch with your chosen lender. Discuss your situation and they will most likely give you a more personalised advice.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day!
Cheers,
Joshua
Hi, am looking for info on borrowing for over 55’s communities. If there is any special criteria. Also asking if at age 57 and bring employed full time do any lenders still lend for 30 years for full doc home loans. Thanks
Hi there,
Thank you for contacting finder.com.au we are a financial comparison website and general information service.
There are loans called reverse mortgages that will allow you to access equity in any current property to help you relocate to an over 55’s community. Alternatively, you can contact a mortgage broker who can offer you personalised advice on lenders they will offer you lending for this purpose also.
Regards
Jodie