Meeting all the criteria for a home loan can be a complicated business.
Obtaining approval to borrow the amount of money you need to buy a unit or a house isn’t always as easy as the advertising campaigns of the leading banks suggest, even for those in regular, well-paid employment.
If you don’t slot into a lender’s standard borrower profile or are self-employed, there are even more hurdles to overcome. But there are tried and tested ways to pitch your loan application to boost your chances of success.
Smart financing strategies depend on research and preparation. First, you need to understand the systems that banks use to support their lending decisions. It also pays to know the best lenders to approach if you’re self-employed or earn a significant chunk of your income from commissions and bonuses.
Regardless of whether a loan is for your home or an investment property, you need to be able to ”stress test” your finances. For example, will you be able to meet your repayments if interest rates go up 2 per cent? What will happen if your income falls?
Work through these issues right from the get-go. You need to be fully across such vital information before you visit a lender to ask for a loan pre-approval.
Many borrowers become disheartened when they are told they cannot borrow the amount they want.
While it’s true that the banks are awash with deposit funds and keen to lend, they’ve also tightened their lending criteria since 2009.
Never forget that lending is about balancing risk and reward. You might think that securing a new job is fantastic, but lenders need to know if you’re going to stay in the position over the longer term.
Most lending institutions won’t give you a loan until you have completed a probationary period in a new role. That can be as little as three or as long as 12 months, so it’s crucial to arrange loans before changing jobs.
A large proportion of lenders will consider your application more favourably if you are moving jobs within the same industry. They may get jittery, though, if you are switching industries. The Commonwealth Bank is one of the more understanding lenders in this regard and will consider loan applications after three months’ employment in a new industry.
Every potential borrower needs to demonstrate consistency of income. Patchy employment records aren’t helpful. If you’ve left work to have children, most lenders will apply the standard three-month employment restriction. You may get around this standard rule, however, if you return to a similar job with a former employer.
If you’re self-employed many banks view you as a potential bankrupt, unless you have a proven track record. Lenders are well aware that most new small businesses fail.
Typically, a self-employed person must have at least two years’ worth of financial runs on the board to be considered for a loan.
That’s where things get more complicated. You may pay yourself an $80,000 salary out of your business but lenders will also want to check your overall profit-and-loss situation. Many financial institutions prefer to factor in depreciation and other business expenses to determine your borrowing capacity.
If there’s a variance of more than 20 per cent across two years’ financials, many lenders will refuse to offer a loan.
Mortgage brokers often recommend ANZ to self-employed people. Unlike other big lenders, the bank requires only one year’s worth of financial data from within the past two years. It’s a more relaxed attitude that makes borrowing easier for those involved in start-up businesses, where income levels can yo-yo from year to year.
There are other constraints that govern loans to the self-employed. If possible, get your loans up and running before you start your own business. A savvy broker can also help to identify lenders who may be prepared to loosen their loan criteria.