First Home Buyer's Guide

Qualifying for a loan

There are two types of people who read this post like they’re Sherlock Holmes

1. Those who are so good with money they absolutely don’t need to read this page

 

2. Those who know they’ve got problems

 

Pro Tip: If you’re in the middle, don’t worry you can skip ahead. The test is multiple choice and I’ll give you a hint - just choose ‘C’. If you’re Category 2 don’t worry. When it comes to qualifying there is always a plan and we can help you with that.

 

The ‘5 C’s of Credit’ are just as important today as ever. The 5 Cs stand for character, capital, capacity, collateral and conditions but what does that mean for you and your ability to qualify for a home loan

Character

Lenders need to know the borrower and guarantors are honest and have integrity.Simply put, lenders consider your personal and business reputation. This largely involves a look at your credit file. The lender will check to see if you have had any blemishes  such as defaults or bankruptcy.

Lenders will also consider your stability as a borrower, specifically, how long you have been in your current job and how long you have lived at your current address.

If you don't have the greatest history don’t worry, not all is lost, you may be able to qualify with what we call 2nd and 3rd tiered lenders who specialise in non conforming files

 

Capital

Capital is your net wealth. This is essentially all of your assets and valuables minus your liabilities

For example, take your savings, car, investments such as shares, real estate you own and superannuation minus any personal loans, mortgages, HECS, credit card or other debts.  

Capital is important as in the event of a financial setback like losing your job, banks like to see that you have a safety cushion for repaying your liabilites such as your home loan.

 

Capacity

Of course in the current climate banks are very aware of responsible lending and of course that includes making sure you can repay the proposed loan without hardship. The banks work out capacity using a debt to income ratio or “servicing” ratio which is based on how much you earn compared to your level of debt. Simply your incoming versus your outgoings.  

 

 

Something to keep in mind when looking at capacity is credit cards. Whether you owe 200 or 2000 if your limit is 3000 the banks will assess your capacity as if you owe 3000 - so watch out for those high credit card limits that arent needed or being used they may well be affecting your borrowing capacity more than you realise!

 

Collateral

This is the property which is used to secure the loan typically it should be equal to or greater than the loan amount depending on loan type.

 

 

Secure means that if you’re unable to make your mortgage repayments, the bank has the right to seize your property to repay the debt although other avenues are explored before going down this path, including reducing or freezing your home loan repayments for period of time. If you can’t provide collateral or security in the form of property to a satisfactory amount, a number of lenders offer guarantor loans, They work the same as a standard home loan except your loan is secured by an alternate’ home such as your parents. Best of all, you can borrow the full amount of your property plus the costs of completing the purchase (stamp duty and other legal fees).

 


 

Conditions

This refers to the financial conditions that exist at the time  that you submit your application, specifically your interest rate, principal amount and general market conditions.  As part of conditions the lender will also ask the borrower what the purpose of the home loan is, as purpose has a great affect on the conditions of the loan.  Due to recent changes most banks and lenders have reduced the amount investors can borrow. Because of these conditions, home buyers can still borrow quite high where as investors can be restricted, at times where lenders are getting restritive on different buyer and market segments its imperative to speak with a broker who can navigate all of the different “little mine fields” . Stricter lender consitions can also apply to the type of property such as rural properties, small apartments, certain postcodes etc - all of these properties can be affected by market conditions which in turn can affect the conditions the lender puts on the loan  such as lower Loan to value ratios for properties in higher risk areas and higher risk could be considered a smaller purchase market



 

Pro tip 2: It’s never too early to have an expert take a look at your situation and before you do anything (change job, take a loan, purchase something interest free) - talk to an expert.

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© 2018 Parker Lane. 

Parker Lane is a trading name of Upside Downside Pty Ltd. Australian Credit License Number 482276

The information contained in this website may not be current or complete, or may not remain current or complete, and therefore under no circumstances should be relied upon. No warranty or representations as to its accuracy or completeness is provided. We are not liable to your or any other person for loss, damage or injury arising from the use of, or reliance on, this information, including but not limited to loss suffered in connection with incorrect or out of date information. It is not intended to be a substitute for professional financial advice and does not purport to guarantee any projected amount of borrowings. All applications for credit are subject to normal credit approval criteria. Parker Lane specifically disclaims any responsibility or liability for any losses or damages arising from any use of or reliance upon any calculations or conclusions reached using this website. See our credit guide for further details.