The simple guide to lending criteria for home loans

If you want to qualify for a home loan, you’ll need to make sure you meet your lender’s lending criteria. Learn more about the lending criteria for home loan applications.

Choosing a home loan is one of the most important financial decisions you’ll ever make. Not only can it help you buy the home of your dreams, it will also affect your financial situation for years to come.

But lenders don’t give out home loans to just anyone. They impose a range of criteria to ensure that borrowers will be able to comfortably service the mortgage.

So what sort of criteria do lenders impose and how do they affect you? Read on to find out.

What factors contribute to home loan lending criteria?

If you’ve applied for a home loan before, you’ll know that it’s a complicated process. Instead of simply choosing a loan and signing up for it straight away, you’ll have to answer a range of questions about your finances and provide evidence to support your answers. This is how lenders determine whether or not you meet the lending criteria.

Lenders assume a certain level of risk when they offer finance to customers. For example, if a borrower defaults on a loan and is unable to repay the borrowed amount. With this in mind, banks and non-bank lenders will have their own set of lending criteria in place to help sort the borrowers they are happy to take on (those who are likely to be able to service their loan) from the high-risk borrowers that may not be able to make repayments on time.

For example, to qualify for a particular loan, you may need to have a minimum deposit saved, such as 20% of the property purchase price. You may also need to be working full-time, be able to provide proof of income dating back a couple of years and also be wishing to borrow less than a certain amount.

Basically, the lending criteria determines whether or not you are eligible to apply for a loan. If you do, the answers to the questions you give during the application process will also be used by the lender to determine how much you can borrow.

What lending criteria will I need to meet to qualify for a loan?

Lending criteria generally falls into three categories: you and your finances, the loan itself, and the property you plan on purchasing.

The lending criteria you will have to meet to qualify for a home loan will vary depending on the individual lender and the loan you select. Common criteria you may come across when comparing home loans include:

You and your finances

• You must be 18 years of age or older
• You must be an Australian citizen or permanent resident
• You must be employed full-time and be able to provide details of your employment
• You must satisfy minimum income requirements
• You must be able to provide proof of income for a certain period of time, such as the past six months
• You must provide evidence of consistent savings over a certain period, such as the past six months. Alternatively, evidence of previous repayment history may be required.
• You must not have been declared bankrupt or have any blemishes on your credit file
• You must be able to provide proof of a history of stable living arrangements

The loan

• The amount you wish to borrow must not exceed the loan’s maximum loan-to-value ratio (LVR). In other words, you’ll need to have a minimum deposit saved, with a common amount being 20% of the property’s purchase price
• Your proposed borrowing amount must fit between the minimum and maximum loan limits imposed by the lender
• You must use the financing from the loan for the purpose it is designed for, such as using an investment home loan to purchase an investment property

The property

• The lender must be satisfied that it will easily be able to sell the property if you are unable to repay your loan
• The location of the property may influence the maximum LVR available to you
• The property must be zoned for residential use

Each lender will use its own criteria to work out whether or not you will be able to afford your loan. The assets you own relative to the liabilities and debts you have will be considered as well as your ability to make fixed repayments towards the money you borrow.

As a general rule, banks impose more conservative criteria when assessing potential borrowers than other lenders, but circumstances vary depending on the lender and on your financial situation.

How does the criteria differ between lenders and loans?

When shopping around for a home loan, don’t assume that all lenders impose the same criteria on all potential borrowers. Different lenders are willing to accept different levels of risk (some even specialise in taking on borrowers with poor credit history or only a small deposit saved up) and different loans are designed to meet the wide-ranging needs of borrowers.

For example, while one loan might have a maximum LVR of 80% (which means a minimum deposit of 20% of the purchase price is mandatory), others might have a maximum LVR of 95%.

A lender’s borrowing criteria is influenced by the products it offers as well as the size and financial strength of the lender. A range of economic conditions can also lead to changes in lending criteria, as was seen in 2015 when the big four banks tightened their guidelines for investor lending in an effort to cut down speculative investment in the Australian housing market.

Another common example of how lending criteria can differ is in low doc loans. These loans are designed for borrowers who can’t provide the normal proof of income that other borrowers can during the application process, such as regular payslips. Perfect for self-employed borrowers, low doc loans come with different lending criteria, such as a requirement to provide personal and business tax returns along with a signed declaration stating your income. However, low doc loans often also come with lower loan-to-value ratios than normal loans, such as 60% or 70%.

Read the fine print attached to each loan or contact a lender directly for more information on the exact criteria that applies to different loans.

How can I improve my chances of loan approval?

While the home loan application process can be a little daunting, there are several simple steps you can take to improve your chances of being approved for a home loan:

• Know the criteria. Before you apply, check with the lender to see whether you meet the basic eligibility criteria. Are you old enough? Are you making a purchase that the loan was designed to fund? Do you have a large enough deposit saved and do you want to borrow an allowable amount? Knowing this information in advance can save you from wasting your time on applications that are unlikely to be approved.
• Establish stability. If you can show that you have a solid employment history and a strong history of savings, your chances of satisfying a lender’s criteria are greatly improved. Banks and other lenders appreciate stability in borrowers, so try to be the person your lender wants you to be.
• Get evidence. Providing supporting documentation is a crucial part of the home loan application process, so gather up evidence of your loan repayment history, income, savings and more. Preparing this information in advance will put you in good stead when you begin to apply for a loan.
• Check your credit history. Request a copy of your credit file to find out whether there are any defaults or negative repayment histories recorded in your name. Repairing your credit history will improve your borrowing chances.
• Choose your lender carefully. Consider the products a lender offers and its approach to lending before deciding if you’re likely to be approved for a loan. If you have a less-than-perfect credit history and can’t provide substantial evidence of income, you may need to find a lender that specialises in loans for high-risk borrowers.
• Ask a mortgage broker for help. Mortgage brokers are home loan experts who can help you find a selection of suitable loans and walk you through the application process. They can also negotiate better loan terms on your behalf, so don’t hesitate to ask an expert for assistance.

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