How Do Lenders Assess Home Loan Applications?

When applying for a home loan, it is vital to understand how lenders assess your situation.

Lenders, whether banks or non-banks, carefully consider applications before approving or declining them. While credit policies may differ among lenders, they all follow similar guidelines when when it comes to home loan assessment.

The factors lenders consider when assessing your loan application include your ability to repay the loan, the security you offer, your capacity to repay the loan, and your deposit.

Breaking Down the 4Cs of Home Loan Assessment

CAPACITY

This pertains to a borrower’s ability to sacrifice avocado toast and streaming subscriptions to repay a loan. This is determined by your credit history, which includes factors such as your current and past employment and living arrangements, loan history, length of time to repay loans, defaults or missed payments, bad debts or judgments, and the number of credit enquiries you have made.

COLLATERAL

Collateral is the security you offer your lender in case of a loan default. Your lender will evaluate your purchasing property to determine if it’s suitable collateral. They’ll consider the size, location, and property type to ensure they can sell it quickly without financial loss. And remember, different lenders have different preferences – what one lender rejects, another may specialize in.

If you are purchasing an investment property, your existing property portfolio is used as collateral, and the type and location of the property you already own are determining factors in the assessment.

CHARACTER

Believe it or not, character is a factor lenders assess on home loan applications. Your financial character is like a first date – your lender wants to know if you’re stable, reliable, and trustworthy. They’ll examine your employment history, credit enquiries, and loan repayment history to determine if you’re a high or low-risk borrower.

Remember, honesty is the best policy – any fraudulent information on your application is a major red flag. Your lender will scrutinize your current lifestyle expenses to determine if you can handle the additional financial burden.

CAPITAL

Your capital is your contribution to the transaction. It’s your skin in the game and is represented by your loan-to-value ratio. The higher your contribution, the lower your LVR and the more likely you will get a favourable loan. So, if you plan on buying that dream home, it’s time to start saving up for that down payment!

Lenders assess your deposit, the amount you bring into the loan as your deposit, referred to as the Loan Value Ratio. If you have less than a 20% deposit, your loan application will be submitted to a mortgage insurer, and you may be required to pay Lenders’ Mortgage Insurance. Credit is relatively easy with a 20% deposit or more, meaning an LVR of 80% or lower.