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Getting your loan approved is just as important as choosing the right loan.

Most people don't realise how difficult it can be to meet the Lender's strict criteria. Getting help from your True Choice Home Loans Mortgage Analyst / Broker is one way to avoid disappointment.

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Qualifying for a Home Loan

There are many criteria which the lenders use to determine who will be granted a home loan. It is not just a matter of whether or not you can afford the repayments. In fact, when determining how much a person can borrow, your income is only one of several criteria to be assessed.

Qualification Questions:-

Do you have sufficient deposit?

As a general rule, most Lenders will require that you have at least 5% deposit plus sufficient additional funds to cover the costs of buying such as:-

The additional funds to cover buying costs could range from around 3%, up to 6% of the purchase price, which means that in real terms, you should have access to a total deposit of at least 8% and possibly as much as 11% or more.

The reason for this is that on most transactions, the Lender will not lend more than 95% of the what they consider to be the Security Value of the property, which means you must have at least 5% of the purchase price plus your buying costs. The interesting thing is that in some situations, the Security Value might be different from the Market Value or Your Estimated Value.

Security Value is calculated as the LESSER of the contract purchase price or an independent valuation of the security property.

Examples

  1. If the Purchase price is $100,000 and the Valuation is $100,000 then the Security Value would be calculated as $100,000
  2. If the Purchase price is $120,000 but the Valuation is only $100,000 then the Security Value would be the LESSER which would be $100,000
  3. If the Purchase price is $100,000 but the Valuation is $120,000 then the Security value would still be the LESSER of the two being $100,000

In these situations, you may be faced with the prospect that you will need much more than just 5% for a deposit. If you have any concerns regarding your particular transaction, please phone True Choice Home Loans on one of the above numbers for assistance.

You may also find yourself in a situation where the particular transaction you are entering into falls into a different deposit category where the maximum loan may be reduced even further. For example, a lender may only lend up to the following percentages of the Security Value in some cases:-

  • Refinance of an existing loan - a maximum of 90% of the Security Valuation, making your deposit requirement increase to 10% plus buying costs
  • Properties with special zoning or in remote locations - a maximum of 75% of the Security Valuation, making your deposit requirement increase to 25% plus buying costs
  • Owner Builder - a maximum of 50% of the Security Valuation, making your deposit requirement increase to 50% plus buying costs

Finally, there may be situations where you don't need a deposit at all. This may be the case where you have additional security property to offer the Lender, or where you have sufficient equity in another property loan where you can access (redraw) surplus payments to cover your deposit requirements.

It is very important to understand how these matters may affect your individual circumstances so as to avoid any disappointments. True Choice Home Loans are happy to help you with these matters if you require.

In summary, to qualify for an "acceptable deposit", consider these matters:-

  • Does your deposit cover the 5% genuine savings requirement? (Remember, your last 6 months Bank Statements showing savings will be required as evidence)
  • Does your deposit also cover buying costs?
  • Will the Security Valuation affect the amount of the deposit required?
  • Will the particular transaction you are undertaking affect the amount of deposit required?
  • Do you have additional security to offer, or equity in another property, that may be a substitute for a deposit?
  • Calling True Choice Home Loans for assistance
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Is the property an acceptable security?

When a Lender is looking to provide finance for a house purchase, they need to assess what might happen in the event that the borrower does not repay the loan as agreed. In these cases, the last resort for the Lender is to sell the house property they hold as security to clear the debt. To ensure that their risks are minimised in this event, the Lender will want to be satisfied that there is a reasonable prospect of obtaining a minimum amount from the sale of the property to repay the debt, cover any arrears as well as legal and selling costs.

In order to minimise the potential for loss for the Lender, the property will need to be sold quickly. This is not always achievable, especially where the property may be in a remote location. Some Lenders will not lend money to purchase properties which may be outside their preferred post code areas or may lend reduced amounts if they consider the property to be in an area where prices are volatile and may fall in value. As a general rule, properties located in metropolitan areas are not usually a concern, however certain types of dwellings such as units which are less than 50 square metres in size may be more difficult to finance because the Lender may feel they are more difficult to sell.

It is a good idea to find out if the particular area you are looking at buying in, or the type of property you are looking to purchase will present any difficulties. Give True Choice Home Loans a call if you are unsure. Other areas that may be less acceptable to Lenders include rural properties and properties located in towns with smaller population levels. It mostly comes down to the Lender's opinion of what might be more difficult to sell. The definition of what is hard to sell varies from Lender to Lender.

The Lender will also want to be comfortable that the original value of the property will be maintained or enhanced and not reduced or eroded. This may come about for example if you intend to complete renovations. The Lender may worry that in order to complete renovations there may actually need to be some demolition of part of the property before renovations commence. If the renovations are not completed, or not completed satisfactorily, it may reduce the value of the Lender's security.

In some cases, the valuer who is appointed by the Lender may believe that you have paid too much for the property and will place a lower Security Value on the property. This may happen where the purchase price may include other items such as some household furniture included in the price or some type of rebate to the purchaser if settlement is completed by a certain date. Any reduction to the Security Value will mean that you will need to make up the difference by increasing the size of your deposit.

A property may be deemed as being an unacceptable security if it is in need of repair, encroaches on a neighbour's boundary, is subject to certain types of easements, or subject to flooding or erosion or has buildings or fixtures which are not approved by the local council. Your solicitor can assist with identifying some of these issues but you should always make your own enquiries before it is too late.

The zoning of the property may also cause a Lender to reject the property as an unacceptable security. Commercial properties, or income-producing properties - such as farms, shops or houses with stables, may be classed as unacceptable, as generally, Home Mortgage Lending is NOT available for these types of properties.

In summary, to qualify as an "acceptable security", consider these matters:-

  • Is the security property located in an acceptable location? (postcode area)
  • Will the security property achieve the required Security Value? (after independent valuation)
  • Is the security property in acceptable condition and repair?
  • Will the zoning of the property affect the valuation?
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What is your current Employment status?

The Lender will be looking for you to to earn sufficient money in the future to enable you to repay your home loan so that they will not be placed in the situation of having to sell your property to clear the loan.

Although the Lender will look at the amount of money you are currently earning, they need to be satisfied that you have a reasonable capacity to keep earning that level of income in to the future. Historically, those borrowers who have had full time jobs and have been in working with the same company for many years, present a lower risk for a Lender. Conversely, those borrowers who don't hold jobs for long periods or change the types of jobs they do, present as a higher risk to a Lender.

Unfortunately, in today's working environment, there has been a number of changes regarding how people work. In the old days, a person may leave school, find a job with a bank or government department and stay there until they retire. These days, people move jobs more frequently to obtain more skills and better conditions. There has also been a change in how people are employed. In some job categories, employment contracts for a set number of years are the norm. In other fields, casual employment may be all that is on offer. The important thing is that the Lender needs to know all about your employment history and have sufficient information regarding your future prospects to satisfy itself that you can meet your loan obligations over time.

The lender and / or mortgage insurer will require certain documents to verify your employment details such as tax returns, pay slips and may even contact your employer directly. An outline of what might be acceptable employment status follows:-

  • Permanent P.A.Y.G. employment - a minimum 6 months in your current employment. If you have been less than 12 months in your current employment, you must have been in your previous employment for at least 2 years and in the same field.
  • Permanent part-time employment - a minimum 12 months in your current employment.
  • Casual - a minimum 12 months and in addition to your normal employment. Caution will be exercised if casual employment is the only source of income.
  • Second Job - you must have 2 years continuous history in the position.
  • Self employed - at least 2 years trading in the current business.
  • Contract employment - A minimum of 12 months in current employment is required in this instance.

A lender will be more receptive to variations outside the above guidelines if you can provide them with additional information to support your particular situation, such as a detailed explanation of your job history, your past achievements and education.

In summary, to qualify as "acceptable employment", consider these matters:-

  • What is the length of time you have been in your current employment?
  • What is the nature of your current employment: Full time / part time / casual / contract / self employed?
  • How long have you been consecutively employed in the same type of employment?
  • Does the industry you work in place restrictions on the type of work available?
  • What additional information can you provide a Lender to satisfy them that your future employment prospects are sound?
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Do you move residence often?

The lender is looking for you to be reasonably stable in you personal life. Stability of Residence is used as an indicator of this.

Have you been at your current residence for more than 2 years?

If not, what length of time have you spent in each of your residences in the last 2 years?
Usually, more than 3 addresses in the previous two years will be scrutinized heavily by the lending institution.

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What is your expected income during the life of the loan?

Each Lender will calculate your ability to meet your home loan repayments. To do this, they will use your current income figures (not expected income) and perform a calculation called serviceability. Each Lender has their own method of calculating serviceability, and hence your total lending capacity will vary from Lender to Lender. Irrespective of how much you can afford to pay back on a home loan, if you don't meet the Lender's deposit and other requirements, your loan application may be rejected.

The following table provides an indication of how a Lender may access different forms of income or different types of employment. Always remember that the Lender will perform various checks with your employer, or previous employers, to verify the information you provide to them. If you have an unusual situation with regards to your employment, please phone True Choice Home Loans for assistance.

To calculate your income for this process, the Lender looks at the source of your income.

Wages Lenders usually accepts 100% of this figure (see 'Stability of Employment')
Overtime Lenders usually accepts 50% of the average income if you have consistently earned overtime during the last 6 to 12 months
Bonuses Lenders may accept bonuses if they have been consistently earned during the last two years
Rent Lenders usually accept up to 75% of the rent received as income (this makes allowances for vacant periods)
Interest Lenders may accept interest income if it has been regularly paid over the last two years, otherwise it is usually disregarded.
Dividends Lenders may accept dividend income if it has been regularly paid over the last two years, otherwise it is usually disregarded.
Maintenance Most lenders do not accept maintenance as income, but where they do, the child(ren) for whom the maintenance is paid must be under 10 years of age, and the maintenance payments need to be supported by a court order. 50% of the maintenance is then usually used to calculate serviceability
Family Allowance Many lenders accept Family Allowance paid for children under 10 years of age. Any rental assistance paid is deducted from the Family Allowance amount prior to calculating serviceability.
Other Social Security Many lenders accept Social Security payments (at 100%) where they are paid to a second or subsequent applicant.
Unemployment Unemployment benefits do not fit the lenders criteria as income.
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What are your expected expenses during the life of the loan?

Each lender will calculate your ability to meet your home loan repayments. To do this, they will use your current expenses (that will continue following the loan transaction) plus the new repayments and perform a calculation called serviceability. Each lender has their own method of calculating serviceability, and hence your total lending capacity will vary from Lender to Lender.

Existing Loans Required Monthly repayments are required for all loans.
Credit Cards Credit LIMIT on each credit card is required - the lender will seldom work off the amount owing as that can change at any time
Rent The lender makes allowances for continuing rental commitments
Maintenance Monthly maintenance expenses are included in serviceability calculations
HECS/PELS Higher education debts are included in serviceability calculations
Cost of living Each lender calculates your cost of living, based on your family size, number and type of motor vehicles, educational expenses etc.
New Loan repayments Each lender calculates your expected loan repayments, and usually with a loading added to the interest rate (1.5 - 2%) as a buffer for future interest rate rises. This buffer helps the lender feel more content that should interest rates rise in the future, you will be able to make the required increased repayments.
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What is your credit history like?

Each lender will evaluate your history of paying debts to others. This will give them some indication of how you may deal with them in making your required repay for your loan.

Late payments Evidenced from loan statements, or from direct liaison with the lender involved.
Demand Evidenced from a Baycorp Advantage Statement
Defaults Evidenced from a Baycorp Advantage Statement
Judgements Evidenced from a Baycorp Advantage Statement
Bankruptcy Evidenced from a Baycorp Advantage Statement

If you suspect that you have credit problems, the best idea is to

  1. Obtain a copy of your credit reference from Baycorp Advantage.
  2. On receipt of the credit report, forward a copy to True Choice Home Loans for assessment
  3. Have True Choice Home Loans advise you of your best course of action after reviewing the report.
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