There’s only 2 home loan approval criteria that you’ll need to pass when you’re applying for a loan.
If you fail either one, your application will not pass go and you will not collect $200.
Watch the video for a simple explanation
Watch the above video for a detailed, although brief, behind-the-scenes peak at what happens in your home loan application.
#1 Home Loan Approval Criteria: You
You and your personal attributes – that’s the criteria that relates to you, personally.
The bank first has to accept you, the person. And determine that you are an acceptable borrower, along with the amount they’re prepared to lend you.
No matter how many millions you have in the bank, you must be able to verify your ongoing income and capacity to meet loan repayments for the term of the loan (as per the banks assessment criteria).
If you can’t, then you won’t satisfy the home loan approval criteria – and you’ll end up with a home loan refusal.
There’s many variables that go in to determining whether you actually pass your banks home loan approval criteria.
Each of the items listed below has potentially dozens of different ways a lender could assess you, and when you combine them all – determining which lender is a good fit for you, can be difficult.
The home loan approval criteria that relates to you:
- Your employment. Including your occupation, employment type (eg. self-employed, full time, casual, temporary), length of employment.
- How much do you earn? Along with your income type (base pay, casual, overtime, allowances, etc).
- Your expenditure – liabilities, living costs. How many dependants?
- Credit scores and credit checks.
- Your lender conducts a borrowing power calculation, which contains many unique variables determined by that lender (lenders call this serviceability).
- Is Lenders Mortgage Insurance required?
Example failure of home loan approval criteria
No matter how much money you have, if you can’t prove an income to support your ongoing repayments, you won’t get a loan.
For example… Assuming:
- Your borrowing power is $300,000.
- You’re purchase a $1M property.
- Current savings are $650,000… Yes, you’ve been a great little saver!
- Therefore, you need to borrow $350,000 to complete the purchase.
- You’re convinced you can afford the extra loan and have a great savings history to prove it.
- Unfortunately, you’ll get a home loan refusal. Even though you’ve got a LOT of cash in the bank, your income dictates that you can only afford ongoing repayments on a loan of $300,000 so you can’t go ahead and borrow the required $350,000.
Thankfully, it’s common for maximum borrowing power to vary significantly from bank-to-bank, so you might suit other lenders… Read more on borrowing power over here.
#2 Home Loan Approval Criteria: The Security
Your property – that’s the criteria that relates to the house, can affect everything.
The property you offer your bank, is also called the security.
It’s called that because it’s the banks security, their safety net. It helps ensure that no matter what happens with you – the bank can get their money back.
But security is the banks fall-back position, not something they like to rely upon. However, no matter how strong your income is – if you’re unable to satisfy the banks security criteria, you’ll get a home loan refusal.
Satisfying the banks security requirements…
If your property is a regular home in a primary location, you’ll probably have no issues. But the property will still come with a minimum deposit or equity requirement, so far as your bank is concerned.
The minimum deposit or equity required can differ depending on the property type, location, purpose, and sometimes your personal history.
The minimum deposit or equity is determined by an LVR calculation, and your required LVR can differ depending on a number of factors (and can change from bank-to-bank).
LVR = Loan to Value Ratio calculation. This is simply Loan vs Value expressed as a percentage.
For example, if you were able to borrow to 95% LVR, the calculation is simply: Purchase price (or value) X 95%.
If you want to borrowing more than 80%, you may have to prove that you’ve actually saved the money, or held it in a bank account for at least 3-6 months.
The home loan approval criteria that relates to the security:
- The property type
- House, vacant land, property zoning, apartment, dual-key apartment, very small apartment, and many more.
- Property purpose
- Residential investment, owner-occupied, business, commercial, etc.
- The location
- Where the property is located can impact the maximum Loan to Value Ratio (LVR).
- What rating is your postcode?
- Have their been comparable sales in the last 3-6 months on your town? (valuer will research).
- Located in town, out of town, CBD apartment, and many other location factors may impact your maximum loan amount.
- Property value
- As price goes up, your maximum LVR may reduce.
Example failure of home loan approval criteria for the security:
No matter how strong your income is, if you can’t satisfy the deposit requirements, you won’t get a loan.
For example… Assuming:
- Investment property purchase for $250,000.
- You have have a $1M borrowing power.
- The you has bank has a maximum LVR of 90%, which requires a minimum deposit of $25,000 (plus stamp duty and other purchase costs).
- Even if you’re $1,000 short in funds to complete, you’ll get a home loan refusal.
Every single lender (that’s 100% of them) will have the exact same process. That is;
- Determine the maximum Loan to Value Ratio for this particular property transaction.
- Calculate funds to complete, to ensure you have enough money to cover all the costs.
And you’ll have make up the cash shortfall, and prove you’ve already got the funds organised.