What to do if you have a low income and need a guarantor.
If you’re a low income earner and require a guarantor, you probably think you won’t qualify for a home loan.
Perhaps you’re a student, receiving government benefits, or you’re just unable to engage in full-time employment; whatever the circumstances, finding a home loan that’s suited for low-income earners as well as someone who needs a guarantor, can prove difficult.
To help, we’ve created a comparison of home loans that are suited for low-income earners as well as those who need a guarantor.
How much do I need to earn to qualify for a home loan?
Providers have their own lending criteria for low income earners and those using a guarantor, which won’t be disclosed until you start your application. However, you can use our borrowing power calculator to get an idea of how much you could borrow with your part-time income.
When you apply for a loan, lenders will evaluate the amount you can borrow by assessing your capacity to repay the loan. They will consider your savings and income as well as your expenses (i.e. daily expenses, utility bills, other loan repayments, etc).
Ultimately, lenders will determine your ability to service your loan with the income you receive. With the help of a guarantor, your borrowing capacity will be increased.
Phoebe works as a freelance graphic designer and receives a gross annual income of $40 000 while she finishes her postgraduate university degree.
After doing some research, Phoebe has found a modern studio apartment located in Brisbane. Although the property is out of her price range, her parents have volunteered to help out by going guarantor for a home loan.
Before Phoebe speaks to a mortgage broker or approaches a lender, she wants to work out exactly how much she can afford to borrow. By using the finder.com.au ‘How much can I borrow?’ calculator, she enters her details, as shown below.
|Loan term: 30 yearsInterest rate: 5%Application: single||Gross annual income: $40 000Other income: N/A||Credit card limit: $500|
After entering her details, Phoebe works out that she can afford to borrow a total of $228 000 where her monthly repayments would be $1,224 and the total payable interest on her loan would be $212,623.
How much can I borrow by using a guarantor?
If a lender doesn’t believe you can comfortably service your loan, they may require the signature of a guarantor. Generally young people, individuals with a low income, or those with a small deposit are often required to have a guarantor if they want to take out a mortgage.
Some lenders require a guarantor only for the down-payment, while others require a guarantor for the entire life of the loan. If you’re a first home buyer, chances are you’ll need a guarantor for a longer period of time.
With a guarantor, some lenders allow you to borrow 105% of the property value. However, the majority of banks won’t let you borrow more than 100% of the cost of purchasing the property even with a family guarantor.
What are my chances of getting approved with a guarantor?
The lending criteria for loans involving a guarantor and a low income applicant are somewhat different from those of a standard home loan. This is because lenders are exposing themselves to additional risk by dealing with someone with a low income as well as someone who is not directly borrowing.
During the application process, banks will review the financial health of both applicants and will require your guarantor to provide proof that they have sufficient funds to cover at least 5% of the property price.
Banks will assess a range of factors and treat these applications on a case-by-case basis.
What lenders provide home loans for low income earners as well as those who need a guarantor?
Tips when applying for a home loan when you have a low income and a guarantor
The following tips are general advice about how you can improve your home loan application:
- Joint application: By applying for a loan with a guarantor you are combining two or more income sources, which increases your ability to service the loan.
- Borrow less: The lower your loan amount, the higher your chances are of being approved. This is because it’s less risk that your lender has to take. Before applying for a loan, try to save as much as you can to decrease your loan amount.
- Reduce existing liabilities: Lenders will assess the financial health of both you and your guarantor in terms of existing debt and liabilities. The less outgoing cash you both have, the more you can afford to take from your income to pay for your loan.
- Lower risk with guarantor: Essentially, your guarantor is taking responsibility to repay the loan in the event that you default. This ultimately reduces your risk as a borrower.
What documents will I have to provide?
Typical home loan applications will require several documents from both you and your guarantor. Generally, these documents include, but are not limited to:
- Proof of identity (i.e. passport, birth certificate, driver’s license, etc.)
- Proof of income (i.e. recent payslips, letters of employment, tax assessments, etc.)
- Australian Tax File Number (TFN)
- Proof of Australian residency (i.e. utility bills, rate notice, etc.)