Applying for a home loan is a big decision. Besides considering the interest rates, term lengths, and other details of the home loan, you may worry about whether or not your loan application will get approved.
Lenders use a variety of criteria for assessing the risk of each application. If the borrower is deemed a high-risk, the lender may propose a higher interest rate or deny the application.
Understanding the criteria that lenders in Australia use to evaluate your ability to pay the monthly repayments may help you in your search for a home loan.
Start Comparing Rates from the Top Lenders
After determining how much you can afford, you should begin comparing home loans through an online lending platform. This way you can ensure that you have access to the best loan options based on your financial situation.
Consider Your Current Income and Debt
One of the first details that lenders want to look at is your current income. If you do not have a stable income, it is hard to prove that you can complete the repayments according to the terms of the home loan.
Along with your income, lenders will look at your debt. The amount of debt that you have can limit the available funds for paying off other obligations, such as a new home loan. The ratio between your debt and your income is the debt-to-income ratio. A high debt-to-income ratio may make you a higher risk and impact your ability to qualify for a home loan.
The typical recommendation is that no more than 36% of your pre-tax income should go to paying off debts and mortgages, including your future mortgage. If the banks determine that your debt-to-income ratio does not provide enough of a margin for you to pay your repayments each month, you may not qualify for a home loan.
If you are worried about these details, you may consider paying off more of your debt before applying for a home loan. This will lower your debt-to-income ratio and reduce your risk in the eyes of the lender. RBS has a wealth of information you may consider reviewing on the subject.
Decide How Much You Have for a Deposit
The amount of money that you have saved for a deposit is an essential factor for determining if you qualify for a home loan. When lenders review your loan application, the deposit is one of the most important details.
Typically, lenders want you to provide a deposit that covers at least 20% of the property’s value. The deposit determines the Loan to Value Ratio (LVR), which is the amount of the loan compared to the value of the property. With a 20% deposit, you have an LVR of 80%.
If the LVR is greater than 80%, you may have limited options for home loans. You may need to apply for a loan with a guarantor or pay Lenders Mortgage Insurance (LMI).
Determine How Much You Can Afford
Along with the factors already discussed, you should attempt to estimate how much you can afford to borrow. Online lending services provide access to useful tools and online calculators that you can use to determine your borrowing power and estimate your monthly repayments.
