Qualifying for a Home Loan
Lending Criteria by Mortgage Lenders for Prospective Borrowers
Oct 15, 2009
A home loan is probably is the biggest ever loan for most people. It often amounts to hundreds of thousands of dollars. Not surprisingly, qualifying for a home loan doesn’t come easily. Before agreeing to lend $300,000 for a new home buyer, the mortgage lender needs proof that the borrower can keep up with mortgage repayment.
The following are some lending criteria set by mortgage lenders for their prospective borrowers.
Borrower’s Income is a Major Lending Criterion
Obviously, the best way to service a loan is to have regular income. Generally, that means having a permanent and steady job. The mortgage provider will often need to see the borrower’s employment history with the same employer for at least 12 months. When applying for a home loan, the three most recent pay slips, two years of tax returns and proof of continued employment from the current employer in writing will be required.
A word of caution here – if there are plans to switch jobs, wait until a mortgage has been secured first. Changing jobs while trying to qualify for a home loan can affect the chances of getting it.
Ability to Make Home Loan Repayments
In addition to a future mortgage account holder’s stream of income, his ability to make loan repayments also matters to the mortgage company. Things looked into include living expenses, other loan repayments and the number of children or dependents the borrower has. If there are many other financial commitments, the size of the loan may need to be reduced.
Home Buyers’ Assets Count When Qualifying for Home Loans
To gauge how good a home buyer is with money management, the home loan provider also wants to know if he has other assets such as another property, vehicles, equipment, collectibles or a share portfolio.
Home Buyers’ Liabilities Can Affect Chances of Securing Mortgages
A prospective borrower’s liabilities or debts such as car loans, personal loans and credit card bills are things that mortgage lenders check thoroughly too. The lenders are particularly concerned with the maximum credit limit their borrowers’ credit cards have. The higher the limit, the more likely that the borrower will owe the credit card provider a lot of money.
As a result, the borrower may not be able to service his home loan properly as he needs to pay off his credit card bills as well. To improve the chances of qualifying for a home loan, close high limit credit card accounts that are rarely used.
Credit History Matters to Mortgage Providers
An impaired credit history will work against the borrower. If he has not been able to repay his other debts properly or is constantly making late repayments, his home loan application may not be successful.
That said, not having any credit history is not a good thing either. Many mortgage providers are suspicious of people with no credit history and wonder if these borrowers can actually pay back the loan regularly as there are no records of them ever having done it successfully. So it may be better to have huge debts that have been paid off than not having any previous debts at all when trying to secure a home mortgage.
Home Loan Lenders Consider Savings History Too
Although raising a home deposit worth at least 10% of the property price is a good start, having a good savings history counts as well. A prospective borrower who can show that he has genuine savings records over the past few months rather than miraculously accumulating a big sum of money within a short month will be seen more favorably by home loan providers. Bank accounts with regular deposits, fixed term deposits for at least six months and a share portfolio are proof of savings that mortgage lenders want to see.
Several lending criteria apply when qualifying or applying for a home loan. In general, the mortgage lender will consider the borrower’s income, ability to repay his loan, assets, liabilities, credit history, size of home deposit and savings history.
Found this article useful? Read also Managing Rising Mortgage Rates, Choosing the Right Home Loan and Different Types of Home Loans.
Derkley, Karin. Buying & Selling Your Home for Dummies. Queensland: Wiley Publishing Australia, 2006.
Thomson, Jimmy. The Ultimate Guide to Buying & Renting Houses & Apartments. New South Wales: Fairfax Books, 2008.
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