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 that 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?
Lenders need to know that 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, they will consider 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 specialize in non-conforming files.
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. Then minus any personal loans, mortgages, HECS, credit card or other debts.
Capital is important. Important, as in the event of a financial setback like losing your job, because banks like to see that you have a safety cushion for repaying your liabilities such as your home loan.
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 put: 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 aren't needed or being used they may well be affecting your borrowing capacity more than you realize!
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).
This refers to the financial conditions that exist at the time that you submit your application. Specifically these are 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 restrictive 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 conditions can also apply to what type the property is classified. Rural properties, small apartments, certain postcodes etc. - all of these properties can be affected by market conditions. In turn, this can affect the conditions the lender puts on the loan. An example of this is 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.