There is a myriad of factors that lenders consider when assessing a would-be borrower’s eligibility for a loan.
While different lenders’ policies vary, determining your creditworthiness involves several common processes and being aware of these can help you put yourself in the best position to secure an approval.
First of all, they look at your capacity to service the loan. This means determining that you earn enough to meet the required mortgage repayments, and that your income is secure.
While many lenders are willing to accept a range of employment situations and income streams, a strong employment history, particularly stability in your current employment, will go a long way to establishing your creditworthiness.
In addition to your employment history, a lender will also assess your broader financial history. Any missed bill payments could come back to haunt you here so ensure you keep on top of any accounts and loan and credit card payments.
The amount of capital you can put up for the purchase will also be taken into consideration by the lender and, essentially, the larger your deposit, the better your standing. The lower the loan to value ratio (LVR) – in other words, the proportion of the purchase price you need to borrow – the lower the risk for the lender, so the larger your deposit the better.
Lenders will also evaluate your collateral, i.e. what you are offering the lender as security for your loan. The type, price and location of the property are all factors lenders consider. For example, a tiny studio apartment may be harder to secure finance for than a four bedroom home in a blue chip location.
Other assets will also be taken into consideration because the more security options the lender has, the more confident they will be that should anything not go to plan they won’t be left out of pocket.
External factors may play a part in shaping how lenders see your position. For example, during weaker economic periods they will be more cautious in terms of how much they are willing to lend and to whom.
Approaching a lender with no idea of how they will assess you is courting disaster (in the form of a refusal). Enlisting the help of a good mortgage broker, however, is a great idea. They will be well across lenders’ criteria and will be able to match you with the appropriate lender and help you prepare yourself for taking out a loan.