You have found your dream home, you (or your broker) have completed the application and you have provided all of the relevant documentation to support the application. What now? How does your preferred lender assess your application, how do they make the decision to lend you the funds required so you can buy that dream home?
Lending Assessment
There are 5 main areas that the lender will look at when assessing your loan application. Depending on an individual lender’s credit policy will dictate how they assess each of these areas or if there are other areas that will be assessed. Note this is only a guide and what can and will be assessed will vary.
- Servicability – your ability to repay the loan
- Deposit – how much of your own funds will be used to fund the purchase
- Security – what is the value of the property you are borrowing against
- Credit history – your financial history and credit rating
- Current expenses and debts – how much do you spend each month and how much do you already owe.
Based on the assessment of each of these criteria a lender will deciede to either approve your applicaiton, approve it with conditions or reject the loan.
Servicability
A major consideration for the lender is whether or not you have the capacity to repay the loan. Additionally the government put the onus on those providing credit advice and assessing applications to ensure that you are not put into a situation which cause servere hardship. To that end the lender will look at your monthly income, wealth, monthly expenses, lifestyles, and employment history.
Deposit
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. The larger your deposit you make the lower the LVR of the loan, which lowers the risk to the lender. Additionally when lenders assess applications with high LVR’s they will be looking for proof of genuine savings, they will want to see that you have saved at least 5% of the deposit.
Security
The property you are purchasing will be used as security against repayment of the loan. As we have disccussed in previous posts the size of the loan to the value of the property provides the LVR. At LVR’s over 80% the lender will require either LMI (Lenders Mortgage Insurance) or additional security to reduce the risk to the lender if you cannot meet your repayments.
Credit History
Your credit history will typically include loan enquiries made in the past five years for household, personal or family purposes or to purchase, re-finance or renovate a residential investment property, or where you have gone guarantor for someone else with respect to consumer credit. It will also include details of any debts including serious credit infringements and debts that are overdue by 60 days or more.
The lender will use your credit history to assess the likeily-hood that you will default on your loan repayments.
Current Expenses and Debts
While both your current living expenses and debts will have been taken into account when determining if you can service the proposed loan, your expenses and debt provide the lender another area where they can assess how you manage finances and therefore the risk to them in lending the money to you.
For example if you spend all of your income each month and have significant consumer debt (ie personal loans, credit card and store card debt), this will potentially affect your chances of getting your loan.
The key is to ensure that you are open and upfront with your lender and/or credit advisor. When they assess your loan there may be a number of possible outcomes, from approval to rejection. The loan may be approved with conditions or given your circumstances it may not meet that lenders credit policy, but it could potential fit with another lender.
The important point is to understand what your lender is looking for and to make it as easy as possible for them to say YES. It may mean that you have to spend 6 months or a year getting your personal finances in order, showing that you can and will meet your obligations.
Next week will we have a closer look at credit reporting, and what could be on your credit history.