When applying for a home loan, or any line of credit for that matter it’s always good to know what the bank is going to look for. To give you a simple example, some people like to compare the process to a job application.
If you know what the hiring manager is looking for, you’re going to try your best to present all the information required so they can assess and (hopefully) approve your job application. The same methodology applies to a home loan application.
The lending specialist is looking for all the key information to ensure that you can consistently make your repayments without putting you in to financial stress.
With years of experience in assessing home loan applications, Queensland Country Bank Broker Relationship Manager, Glenn Kazich sat down with us to share; the top factors banks consider when assessing loans, what Lenders Mortgage Insurance is and where that money goes, what documents you should prepare ahead of your home loan application, why it's important to have a larger deposit and how banks price their interest rates.
Armed with information on what you need to get a home loan, we hope it helps prepare for your home loan application successfully. Remember that this is general advice only and does not guarantee a loan application approval*.
1. What are some key things that banks look for when assessing your home loan application?
- Length and type of your employment does have an impact. Providing evidence of secure, long-term employment, whether it’s full-time or casual is a requirement on a mortgage application. Generally, if you have been in a full or part-time permanent position for a minimum of three months and have successfully passed your probationary period, this would appear more favorably on your application.
- Similarly, if you have changed industries entirely, it’s preferred that you are employed on a full or part-time basis and have held this position for at least one year.
- Casual employment will be assessed over a twelve-month period. So if you’ve just had a job change, it might be best to bide your time and use this time that you’re waiting to better prepare your finances for when you're ready to put an offer in on that home.
- A strong savings history and the right deposit is highly favorable. Demonstrating a disciplined long-term savings history is ideal when applying for your home loan. As a minimum you will usually need a deposit of 5% to comply with Lenders Mortgage Insurance. For example, if your mortgage is going to be around $500,000, your minimum deposit of 5% will equate to $25,000.
- In addition to your available deposit, your lending specialist will analyse whether you have the capacity to meet your new home loan payment and assess that the loan is not unsuitable based on your ability to repay. To help demonstrate your ability to do this your lending specialist might take into consideration how much you’re currently paying for rent at the moment (if applicable) and how much you have been able to save.
- For example, if your current rent payment is $1,200 a month (and you are paying this consistently), and your new home loan repayment is the same amount at $1,200 per month, then this will assist in your lending specialist demonstrating your ability to repay the loan, and help to support your capacity to meet the home loan payments. It is important to remember however that there are expenses and maintenance costs associated with owing your own home which will also be taken into consideration during the loan assessment process.
- The other factor to note is that although your savings history may have existed for longer than three months, the balance on those savings should ideally have increased during that time. If you’re putting money away regularly but dipping into it for expenses just as often, this won’t count toward genuine savings because it shows that you needed that money to live. When you’re trying to build up genuine savings for a deposit, asking yourself, do I need this expense to live? is a handy question that will likely help you curb unnecessary spending.
- The number and nature of credit enquiries can play a role. If you currently have outstanding debt, you are required to let your bank know this from the outset. During your loan application, your lending specialist will go through your expenses and liabilities against your income in order to gain an understanding of your capacity to repay the loan. During this process, your credit file will be cross referenced for liabilities.
- If multiple finance enquiries for consumer debt such as credit cards, personal loans, car loans or pay-day loans are found, you will need to explain the circumstances and outcome of each application. A high number of credit enquiries can raise red flags. It’s important to note that if you have used buy now, pay later facilities like Zip Pay, these are also visible on your credit file. If you don’t need these facilities, it is better to close the account as soon as you can. Your loan application takes in to account available credit, not just the balance you owe. So, for example if you have $2,000 available through AfterPay but only have an outstanding balance of $20, the entire $2,000 will count toward your current liabilities. While this might not seem fair to you, the bank needs a full picture of what debts you could be required to pay when assessing your loan application. This comes back to our earlier point about lending you money with the confidence that the loan won’t put you in to financial stress. i.e. can you genuinely afford to pay back this loan at the time of applying for it?
- The other key factor your lending specialist will be looking for, is your repayment history. Your credit file and bank statements will give a clear picture to the bank as to what your repayment amounts were, when payments were due, how often you paid and any failed payments.
- If you have a credit card, the history and conduct will be reviewed to check if you have regularly met your minimum repayments, that your credit limit is being paid back, and that you have not exceeded your credit limit. If the limit has been exceeded or your credit card, or it isn’t being regularly paid back in full then it can indicate poor financial management and will look unfavourably when your lending specialist assesses your ability and willingness to repay a loan.
2. What is Lenders Mortgage Insurance and where does that money go?
Lenders Mortgage Insurance, otherwise known as LMI is insurance that the bank is required to take out to protect them in the event that the loan amount cannot be repaid.
For example, Jeff stops making his mortgage repayments on his loan for $500,000. This continues for a considerable amount of time and after many attempts to get the loan repayments back on track, the bank and Jeff have a discussion on moving forward with selling the property to recoup the funds.
Unfortunately, Jeff’s property is now only worth $400,000. Therefore, at the time of sale there is a $100,000 shortfall on the mortgage. The bank in this case will claim on the Lenders Mortgage Insurance to recoup the shortfall.
Lenders Mortgage Insurance is paid by the borrower and is generally only required if your deposit is less than 20% or you are not eligible for the First Home Loan Deposit Scheme.
3. What should I have prepared or be able to show when applying for a home loan?
When you are ready to hit the green light and apply for your home loan, it’s important to try and have all the correct information ready for the lending specialist to start analysing. This includes;
- Evidence of savings (or equity in property)
- Evidence of stable income through payslips
- Personal Loan and Credit Card statements
- Home Loan statements (if refinancing)
- Evidence or history of general living expenses. If you’ve done a budget that you live by, bring this along.
This will allow your lending specialist to easily determine your ability to repay the loan and hopefully provide you with an answer as quickly as possible.
4. Why is it important to have a larger deposit?
As mentioned earlier, if your deposit is more than 20% you won’t be required to pay Lenders Mortgage Insurance, which will be an additional fee on top of the required loan amount.
Secondly, and probably the most beneficial part of having a larger deposit is the fact that you may have access to more competitive rates. This is due to the fact that having a larger deposit reduces your loan to value ratio, which reduces your loans risk to the bank and therefore rewards you with a better rate.
Once you’ve found the right rate for you, then you could put the remaining percentage of your deposit (above 20%) into a mortgage offset account. This could help reduce the amount of interest you will pay on the overall mortgage amount. Queensland Country’s mortgage offset account also includes a redraw facility so you’ll still have access to that money should you find you need it for an emergency down the track.
5. How do banks price their interest rates?
In simple and general terms, before a bank determines their home loan rates, they will look at their expenses first. The most significant expense for banks is how much their paying in interest to consumers through the interest rate on savings accounts like everyday transaction accounts and long terms deposits etc.
With this in mind, the bank then looks at what competitors are doing in the market and will then usually evaluate the income earned from other areas of the business. In our case, as we are member-owned, we look at how all of these elements work together in order to give our Members the best outcome.
At the end of the day, a Bank is a business and just like your local pizza shop, they need to manage their income against their expenses and ensure that any decisions made that will affect the business income or expenses, is sustainable for the long term.
Now that you know some of the key areas a lending specialist will look for when assessing your home loan application, you can start to think about when you’d like to get the ball rolling.
To get the conversation started around a home loan, speak with the experts. Our friendly Home Loan Specialists are available to help you get started on your home loan application or answer any questions you may have. Call 1800 075 078 or contact us here to get started.
*Information contained in this article is general only and does not take into account your objectives, financial situation or needs. When considering any Queensland Country financial product or service you should obtain the relevant Product Disclosure Statement, Product Information Brochure, Terms and Conditions and Fees & Charges Brochure which are available online or from any or our branches. In deciding if the product is right for you we encourage you to seek your own advice. Fees and charges apply to products. Normal lending criteria applies to loans.