| How Home Loan Applications are Assessed

Understanding how home loans are actually assessed will give you an advantage in getting yourself and your finances ready for a home loan.

The 3 C’s of lending that you need to consider: Capacity Character and Collateral. 

Yes – your credit score and employment are vitally important, but there is more than your loan application that comes into focus when applying for a mortgage.  Your full financial profile will be examined in detail.

Each lender will do it a little differently.  But be prepared for some uncomfortable questions as your finances are scrutinised.

Capacity (The first C)
This relates to your capacity to pay back the loan.  It is where your income and expenses are examined in detail.   You will need to show “everything”

• Your employment (both current & historical) – You will need to show that you have a good stable employment history and you have not chopped and changed jobs.  Casual employment is not normally considered as “stable”.  
• Other Income – Do you have other income sources?  Like a business on the side or income producing assets.
• Your Expenses – Depending on the lender, nothing is off limits here.  They will not only look at the obvious living expenses, but also your lifestyle and associated expenses (eg: eating out, clothing, sports, subscriptions etc).  You are also best to lower any credit card limits before submitting your loan application. 

Character
This is where they will investigate your credit and employment history.  It is all about stability and trustworthiness.  

• Irrelevant how big your deposit is or good your income appears, most lenders will closely examine your employment history.  They are looking for people with demonstrated, stable employment.  It counts towards your character.
• Your credit history  is the other major factor when assessing your character.  Have you been on time with bills, have you paid off all debts, have you been responsible with credit cards.
• Honesty is the key

Collateral 
What security can you offer if you default on the loan.  This is all about reducing your loan to value ratio. The lender will do a “bank valuation” (different than a market valuation) to ensure they can recoup losses if you default.  The larger your deposit the lower your loan to value ratio providing the lender more collateral.