Buy a home even if you have a low income.
Most people believe that if they have a low income, they’re not eligible for a home loan. This can include those who are unemployed, who are receiving retirement pensions or who are living on government benefits. Similarly, many borrowers with bad credit rating assume that they can no longer be approved for a home loan.
For lenders, income is a driving factor when it comes to approving home loan applications. Typically, what you earn should be able to cover your loan repayments and take into account other expenses that come with being a homeowner, such as repairs, taxes and insurance. The higher your income, the higher amount you can generally borrow.
This doesn't mean a lower income will price you out of the market entirely. While there are no specific low income home loans, you can increase your chances of approval following the tips listed below.
Basic home loan comparison
Rates last updated February 20th, 2017.
- Heritage Bank Discount Variable Home Loan - Special Rate Offer (Owner Occupier) New Customers Only
Advertised rate dropped to 3.79%
August 24th, 2016
- AMP Essential Home Loan - $40,000 to $99,999 (Owner Occupier, P&I)
Comparative rate decreases by 0.10%
August 24th, 2016
- IMB Standard Variable Home Loan - LVR <= 90% Investor
Comparative rate increases by 0.10% | Interest rate increases by 0.10%
January 30th, 2017
How much do I need to earn to qualify for a home loan?
Home loan providers have their own criteria for lending, and these are usually kept a secret. Don't let that deter you from applying for a loan. Start by using a borrowing power calculator, like the one below, to get a rough idea of how much you could borrow with your income.
When you apply for a loan, lenders evaluate the amount you can borrow by looking into your capacity to repay. The amount of money you have in your bank account is a factor, as it shows that you can save money despite your expenses (daily expenses, utility bills, other loan repayments, etc.).
Other costs that may come into play are legal or processing fees, pre-purchase inspection fees, maintenance and repair fees, and insurance. Don't forget to factor in possible rate increases over the time it will take to repay your loan.
The kind of loan you are applying for, and the terms in which it’s to be kept, are also factors. Low income loans for shorter periods may help get you approved for a higher amount. The best way to get the amount you need is to be prepared, and ensure that the loan you are aiming for will suit you.
What income sources qualify for a home loan?
Income is the biggest factor when it comes to home loans, but many lenders consider different kinds of financial sources when evaluating loan applications. Aside from having a job, receiving rental income, or regular government payments, lenders also look into allowances such as Centrelink payments, child support payments, pensions (disability, retirement, overseas, veterans, etc.), and other money sources that augment your living. Provide proof of these sources to submit with your application form.
In some instances, lenders will approve applications for people who are not earning actively, but have a certain amount of money in the bank. This is usually when you’re applying for a loan from the same bank with which you have your savings and other accounts, but other lenders may accept this as well.
The terms and conditions of each lender vary so it’s best to compare each and pick the one that will work best for you.
What income documents will home loan lenders typically expect?
Applying for a home loan is simple. All you need to do is provide the documents the bank or lender requires, fill out an application and submit it. The lender will then evaluate your documents, and after a set number of working days (this varies for each lender), you’ll be informed if your loan has been approved or not.
Traditional loan applications require several documents. Proof of your identity (passport, birth certificate, citizen’s certificate, driver’s licence, and in some cases, credit cards) and proof of your income (recent payslips, letters of employment, tax assessments). Lenders also require your Australian Tax File Number, and proof of residence (utility bills, recent bank statement, rate notice, valid driver’s license with photo).
If you are self-employed, you need to provide both personal tax returns and business tax returns for the past two years, and your balance sheet and profit and loss accounts for the same period. Contractors would need to provide their most recent employee contract that includes their income details. If you are earning any other income, such as from rent or through government benefits, you will need to present proof of that too.
Most lenders require a regular income and a show of assets. Others require GST registration, or if self-employed, you must be working in the same industry for at least 12 months. Business Activity Statements (BAS) are also required.
Tips when applying for a home loan with a low income
You can increase the chances of being approved for a home loan, even on a low income. Here are a few tips to help you:
- Joint application - Apply for a loan with your partner or a co-signer. This combines two different income sources, raising your capability to repay the loan. It also takes into consideration the financial history of both borrowers, so be sure you both have good credit histories. It’s important to note that before you apply for a home loan, you should come to a legal agreement first as to how the property is to be divided in case anything happens.
- Borrow less - The lower the amount you apply for, the bigger the chance of it being approved. This is because it's less of a risk to the lender, and the lower loan size means lower repayments that are more likely to fit within your budget.
- Lessen existing liabilities - Lenders look not just at your income, but also at your other financial activities. The few liabilities or less outgoing cash flow you have, the more of your income you can comfortably devote to home loan repayments.
- Larger deposit - Low income earners can get a better chance of approval if the amount of money they have deposited in a bank account is high. A larger deposit indicates less money is needed, which means a lower income can suffice. It also shows the lender that you have financial discipline and you can pay back your loan on time.