Have you ever lent someone a small amount? Perhaps you might have never asked about the history of your close friend or family member, but what about a complete stranger? Won’t you think at least 10 times before handing over the amount to him/her? This is how professional banks and lenders think when clients (strangers) come up to them and ask for home loans.
With a plethora of applications clamoring out for the lender’s attention, it is easy for the financial firm to get lost. Banks/lenders/financial firms, or whatever you might want to call them, always assess the applications carefully before granting the applicants the required amount of funds as loan. The credit policy of different banks usually differs, and change from time to time due to the economic challenges confronted in the long run. The situation is no different with the Australian lenders. Here is a guide as to how banks assess applications:
1. Your ability to repay loan – To ensure the applicant’s ability in repaying loan, banks would ponder over the individual’s monthly income, wealth, monthly expenses, lifestyles, and employment history.
2. Enough deposit – You have to provide around 10% of the borrowed amount as a deposit to get loan. There are instances when lenders will offer to lend 100% or even higher, but they are getting rarer these days and they will also be at terms favorable to the lender ie. high rates. Having a solid deposit improves your application success chances by showing you are prudent with your finances and capable of saving and helps in your position to secure the best rates possible.
3. Collateral amount – Since property is often a hedge or collateral, as the banks call it, on various loans, but when the loan itself is going to be used for property, there cannot be a collateral as high as the loan amount. Banks would send qualified real estate appraisers to assess the property condition in lieu of its location along with the analysis of the real estate market. If auspicious opportunities spring up, banks could consider approving the loan application.
4. Your financial history and credit rating – After the bank has looked upon the details of the property, it would need to look at the borrower’s lifestyle and character. Even with all of the necessities fulfilled, the bank can still disapprove the loan application if it finds out that the applicant is a dishonest person, and involved in fraudulent debt borrowing practices. Lenders are experts in analyzing not only the application, but also the applicant. For example a 45 year old applicant with no employment status, no credit history, but with an abundance of wealth might likely get disapproved as compared to a 30 year employed individual with good credit history, fair credit score, a mixture of assets and liabilities, proof of current address, and proof of income is more likely to score the highest in achieving a successful loan application approved.
5. Your monthly expenses and current debts – You might have a monthly income of $15,000 but if your expenses are mostly consumed up in your income, then you are hardly to get a home loan. On the other hand, if your income is $10,000 per month with your expenses not more than $4,000 and savings of $6,000, you are more likely to get your loan application approved. Applicants with lower D/I ratio (a measure of debt over income) are most likely to win the loan application. D/I means debt as percentage of your income. Ideally it should be less than 40%. Moreover, your credit history would pride a comprehensive analysis of any current debts or loans you are liable to clear. Your bank might disapprove your application and you might have to wait for a period of more than 6 months in case you are proven of pending loans that need to be repaid. Lenders can be reluctant to borrow 80% or more to applicants already under debt.
Speak openly and frankly with your lender, remember it’s not a personal judgement, it’s an assessment of facts and whether they match a set criteria. It’s just a matter of both parties working together to understand each others requirements, remember they want your business just as much as you want to get the loan, that’s what they are there for.