Home loan requirements and home loan eligibility are important topics to consider when seeking finance. While there are quite a few points to keep in mind, knowing where you stand and what you need to provide will prepare you when the time comes to submit a home loan application.
Here we offer an overview of the home loan documents you’ll need to submit and the factors determining home loan eligibility in Australia.
Home loan requirements
Lenders want to confirm your identity and understand your financial situation before making a lending decision. To do this, they need a range of documents that prove your income, employment status, and financial position.
Identifying you and other borrowers
This starts with confirming your identity, including your full name, age, and current address. Home loan requirements in Australia include being at least 18 years old and being an Australian citizen or permanent resident (or married or in a de facto relationship with a citizen or permanent resident). All persons applying for the loan (such as a married couple) will need to provide their details, including how many dependent children they have.
Some documents you could be asked for to prove your identity and citizenship status include a passport, driver’s licence, birth certificate, Centrelink pension care, Medicare card, recent rates or utility bills.
Understanding your financial situation
When making a lending decision, lenders will want to confirm your income, financial obligations and assets. This includes your income from a job, business if self-employed, and investments, including investment properties. If you are employed, lenders will want two of your latest payslips or a letter confirming the length of employment and how much you earn. If you are self-employed, lenders will want to see income tax returns for the most recent financial years and the most recent Assessment Notice.
If you receive any other income, benefits, bonuses or allowances, lenders will want to see this information. In addition, they will want documentation from investment property rental income.
To determine your borrowing power, lenders will want to know how much you are spending each month. This includes showing what you regularly spend each month on necessities and discretionary spending. Lenders usually ask for three months of bank statements showing your spending habits.
Assets can take many forms, including deposits in savings accounts, investment properties, vehicles, shares and superannuation. Documents confirming your ownership of assets are required as part of the loan application process.
This includes all you owe, including personal loans, car loans, home loans and credit card debts. Lenders will want you to provide documentation showing these liabilities.
Your credit score takes account of your current situation and how you’ve handled borrowing in the past. If you have missed payments in the past, this will show up on your credit score. The lower your credit score, the less likely you will be approved for a home loan. If you’re unsure about your credit score, check out How to Improve Your Credit Score In 5 Simple Steps.
Factors that determine home loan eligibility
Amount of the loan
A major factor in eligibility is how much you want to borrow. Lenders will consider how much you need to borrow compared to the home’s value. This is called the loan-to-value ratio (LVR) and is typically 80% of the home’s value. For example, if a home is valued at $700,000, you can borrow 80% of this, which is $560,000. In this case, you will need to come up with $140,000 as a deposit.
If you can’t come up with 20%, you will need to pay for lenders mortgage insurance (LMI) which protects the lender in case of default. LMI typically costs between 1% and 2% of the loan amount. Find out more about LMI in What is LMI and Does It Apply to Me?
Your employment status and income
Lenders want to see job stability and consistent income when determining eligibility for a home loan. In general, lenders prefer that you have been employed full time for at least three months and have completed the probationary period. If you are self-employed, they want at least one year of income to prove your income. Being in casual or contract work or having multiple part-time jobs will make it difficult to be approved for a home loan.
In assessing your ability to make loan repayments (called serviceability), many lenders determine the percentage of your income (or joint income for working couples) needed to make repayments. Many lenders use the 30% rule, which states that your monthly mortgage repayments should not exceed 30% of your gross income (before tax and other deductions). As mentioned earlier, lenders will want a clear picture of your living expenses in making lending decisions.
Your savings history
The ability to save money shows financial discipline. For this reason, lenders want evidence of regular savings of at least three to six months. Savings can take the forms of savings accounts, managed funds or shares, term deposits, plus inherited funds or cash gifts.
Your credit score
This shows how you have managed debt in the past so that it will influence home lending decisions.
Lenders will want to determine the quality and value of the property, as it is the security for the loan. This can involve getting a professional valuation reporting on the home’s market value, condition and features. Lenders will also consider the location, as some postcodes are considered high risk.
Getting ready to apply for a home loan
Getting your documentation is an important step in getting a home loan. You will also want to get all the facts to make a home loan comparison before selecting a loan.
If it all sounds confusing, expert help is available.
At Reduce Home Loans, we’re happy to assist you in meeting home loan requirements and getting the best home loan interest rate.
Get in touch with us to speak with a home loan expert today.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.