Getting a home loan can be a complicated process. What criteria does the bank look at? What proof do borrowers need to supply?
Before you worry about which loan you want or which lender is right for you, you need to consider your own personal circumstances and your ability repay or service that loan.
If you aren’t sure if you have saved enough for the deposit or how much you can afford to borrow, consult a qualified financial advisor.
What are the 5 Cs & why do they matter to lenders?
These are the five main things lenders look at when assessing a home loan application. Picture: realestate.com.au
While major lenders often look at similar factors when assessing a home loan application, it is important to note that lending criteria can and does vary. Major lenders will define what does and does not constitute a financial risk in different ways.
But realestate.com.au finance experts Ben Kingsley and Bryce Holdaway from the Property Couch have some great advice on what the banks look for in general and how you can ensure your loan application is approved.
The 5Cs: Capacity
Can you afford to repay the loan? Capacity refers to your ability to meet the monthly repayment.
Keep in mind that mortgage stress is when an individual or couple spend more than 30% of their total income on housing.
Would the loan repayments fall under 30% of your income and what kind of savings buffer do you have to cover future interest rate rises?
The 5Cs: Character
This comes down to your ability to prove how stable you have been in your employment and housing history.
Some lenders may be nervous about applicants who work on a casual basis but if you can prove a consistent income over several years, you can prove that you have been a stable worker.
Other lenders may be more interested in how often you’ve stayed in the rental properties where you have lived.
The 5Cs: Collateral
What other assets do you have? Do you own any shares or do you have another significant savings account or a car?
Lenders like to see that there are other assets you own that could be sold or cashed in to ensure you keep up with loan repayments.
Many see other assets such as a car as a financial buffer that may be used as collateral if you struggle to repay the loan.
The 5Cs: Condition
This relates to the specific policies that the lender has around who they give loans to and what criteria they require that individual or couple to meet.
For example, some banks may refuse to give a home loan to an individual who has been declared bankrupt while others insist on all applicants having saved 20% of the purchase price as a deposit.
Yet other lenders may only require a 10% deposit.
The 5Cs: Common sense
Banks can overlook some factors or criteria when they can see that it makes sense to do so.
Perhaps you and your partner are applying for a home loan and while you both earn good money, one of you has only been with an employer for less than six months.
The lender will look at that person’s employment history and see that they have consistently been employed in well-paying jobs for years. In this case, one applicant’s short employment period may be overlooked as the lender can see that person has a history of stable employment.
For more from The Property Couch, visit thepropertycouch.com.au or subscribe to The Property Couch podcast, available on iTunes or Android.
The Property Couch provides a general opinion based on current market conditions. These opinions should not be treated as investment advice. Always obtain advice based on your individual circumstances.
