Buying a home for the first time? The daunting challenge of applying for a home loan can prove to be an unsettling experience if you are stepping into the unknown. Many of the laws, procedures, and regulations that exist to protect you can actually become a hurdle for home loan applicants.
This is why there are institutions in place to help you out such as banks, mortgage insurers, ASIC, state land titles office, lawyers, office of state revenue and (last but not the least) mortgage brokers.
Eligibility Criteria For Approval
It is important to meet the lender’s criteria if you need to obtain a home loan. While this is common knowledge, the range of criteria you should meet matters. You need to clear all the hurdles before racing to the finish line. Here are some you need to know about.
Serviceability
You should be able to meet your mortgage payments every time. This is known as loan serviceability. No single calculation for this is possible. Lenders vary in terms of the measures they use to assess your serviceability. They will consider factors like current and historical patterns of income and employment. Lenders cannot use current interest rates while assessing your capacity for borrowing; they must permit increases so that the rate used, should be about 2% above the average.
Employment
This is another factor to check if you qualify for a home loan. Continuity of employment history is vital, hence your income levels should be secure. If you are self employed, the duration of the employment should exceed 2-3 years. For a regular employee, a job should be held for a minimum period of 12 months. However, different lenders may have different criteria when it comes to employment duration, hence it is advisable to discuss this with your mortgage broker before proceeding ahead with your loan application. Other than that, lenders also take on your future capacity to pay the loan by checking your past. If there is a large disparity in the income declared to the tax office over the past years, the lower value is taken by the lender who then adds around 20%. So while stability of employment is a known factor in influencing the chances of securing a home loan, wide pay discrepancy may prove to be the spoilsport.
Security
The property purchased is used as security for the mortgage. This ensures that the lender holds the title documents until the loan is repaid. Therefore, the nature of the security plays a very important role. Close attention has to be paid to the nature, location, value, and other factors defining the property.
Equity
Equity refers to the difference between the worth of the property and the amount being borrowed. For borrowers with no existing property, equity equals total deposit less costs. Mortgage insurers are involved in most loans over 80%. Mortgage insurers however prefer all borrowers who want loans at over 90% of the value of their property, having saved at least 5% of the value of property purchase price.
Reasons Why Home Loans Get Rejected
Failure to meet the lender’s criteria is a reason why home loan applications are denied. But what are the main reasons for rejection? Remember that loan applications appear on the credit report and consider that these factors may come into play, when rejection is concerned.
Borrower’s Track Record
The employment record or business earnings are a crucial consideration. Lenders often decline interns or those who rotate jobs on a frequent basis. Some lenders are strict, while others are lenient. Consulting with your broker can help you to meet the criteria, however stringent these may be.
Credit Record
Another reason for rejection of the loan application is the credit record of the borrower, especially if there are defaults shown on it. Your credit score provides a measure of your risk of future default based on your credit history. It lets lenders know how much of a risk you are. Furthermore, if you have applied for for several mortgages, credit cards, or other loans in the 12 months prior to applying for a mortgage, it too will cause you to fail the bank’s credit score.
Failure to Disclose
Lenders take a less than favourable view of those who do not mention their credit card use or obscure facts like casual employment rather than full time work. Whether the omissions are deliberate or accidental, it influences the chances of your loan application getting rejected. Ensure that you have mentioned everything.
What To Do If Your Application is Declined
Lender concerns should be considered when your home loan application is rejected. Check if it is worth seeing a broker about success with other lending agencies. If your loan is declined by a mortgage insurer, then you need to look out for this factor, even though you may have won the lender’s criteria.
As discussed earlier, lenders will assess your capacity for repaying the loan. Record of steady employment and self employment of over 2 financial years is an added advantage. You need to be a permanent resident or citizen of Australia with a good credit record. A good track record of saving and meeting existing loans with no late payments is an added bonus.
Conclusion
Home loans are associated with a lot of rules and procedures. It is important to understand and follow these if you want a successful home loan application and secure financing thereafter. This is why hiring the right mortgage broker can make a difference to your ability to get secure funding for your dream home.
It also is a good idea to speak to friends, family, mortgage brokers, or real estate agents to get more insights and advice about the costs. Furthermore, these people can also tell you more about the ongoing rates for things like land rates, strata management costs, maintenance, insurance, and property management. Read about property investment as much as possible and you will find out a lot about home loans in there too.