Before granting you a home loan, lenders will always make sure you meet their requirements and conditions. We explore the seven most common factors they’ll take into consideration when you apply for a mortgage.
1) Income requirements
The first requirement any lender will assess is income: how much money regularly comes to your bank account? When they’re assessing your loan application they will ask for proof of this income. What you need to provide will depend on whether you’re an employee or self-employed.
Your regular salary or wages
If you’re an employee who receives a regular income, the good news is that it should be relatively easy to prove your income to a lender. A lender will usually be satisfied with recent pay slips showing the amount you’re paid both before and after tax. They’ll require three months’ worth of pay slips, which also show your year-to-date total pay. They may also ask for a work contract, bank statements or in some cases a tax return.
If you’re working part-time or casually or if you’ve been with your current employer for less than a year, they’re also likely to ask for further supporting information showing that your employment and hours are stable. This may include a letter from your employer or accountant or your most recent Income Tax Assessment.
How overtime and second jobs are assessed
If you work overtime or a second job, a lender may also take this income into account. However, they’ll usually want to confirm that this extra source of income is both regular and reliable so that you can count it towards your home loan repayments.
The bank may ask for up to two years’ of pay slips or other evidence showing this money entering your account, such as bank statements.
Other income you receive
Many lenders’ requirements will allow them to include any other income you earn when assessing your home loan application. This may include:
- Rental income. If you own an investment property, most lenders will include up to 80% of what you’re paid. They will generally ask you to provide a signed lease agreement and evidence of the rent entering your account.
- Share dividends. You should be able to include a portion of these in your income assessment, so long as you can provide share certificates and statements showing the dividends entering your account.
- Centrelink payments. If you’re entitled to ongoing government benefits, most lenders will include these.
- Other income. If you receive payments from sources such as a family trust or other source, you may be able to include these so long as you can provide evidence of your entitlement.
How income is assessed if you’re self-employed
Being self-employed doesn’t necessarily mean you won’t be able to get a home loan, especially if you’ve been in business for some time. However, a lender will usually want to know that your business is established, that your income is ongoing and that you’ll be able to continue to meet your repayments.
To satisfy this, you need to ask for Financial Statements, Business Activity Statements (if your business is incorporated), Income Tax Assessments and possibly a letter from your accountant. They may also ask to review any long-term contracts you have in place to supply customers or clients, and other evidence that your sources of income are likely to continue.
If you can’t meet these requirements, you may still be able to access finance for your home through a low doc home loan.
If this sounds complicated, many mortgage brokers specialise in helping self-employed workers and business owners access home loans.
2) Deposit requirements for getting a home loan
Most lenders have a requirement that you’ve saved a deposit you can put towards your property.
Why a deposit matters when buying a home
When they’re assessing your home loan, a lender will usually be interested in your deposit for two main reasons:
- Lower repayments. The more money you have to put towards your home, the less you have to borrow, which means your repayments will be smaller and you should find it easier to meet them.
- Greater security. A larger deposit and smaller mortgage means you’ll have more equity in the property you buy. This provides the lender with greater security as they’re more likely to recoup their money if you default and they’re forced to sell your home.
Is a 20% deposit a requirement for getting a home loan?
While lenders may like borrowers to have saved a deposit, it’s a myth that they expect you to always have 20% of the home’s value to put towards your purchase. The reality is that many lenders will allow borrowers to take out a mortgage on a home with a much smaller deposit. Often lenders will provide a loan of up to 95% of the property’s value – or a 95% loan-to-value ratio (LVR) – meaning you only need to contribute five per cent of the amount. That said, you should also make sure you have the money to pay for stamp duty, legal fees and other upfront costs.
In these circumstances, it’s likely they’ll also ask you to take out lenders mortgage insurance (LMI), which will add to the cost of your monthly repayments if you add this onto the loan. An alternative may be to use a guarantor for all or part of the loan.
3) Savings requirements for getting a home loan
Most lenders also impose conditions on how much money you need to have saved, particularly if you have a low deposit. That’s because they believe this shows you’re more likely to have the financial discipline to keep meeting your mortgage repayments over the life of the loan.
The “genuine savings” requirement
The greater your LVR, the more likely it is that a lender will impose the condition that at least five per cent of your deposit money consists of “genuine savings”. This refers to money that you’ve saved yourself over a period of time – usually at least three months.
Sometimes, a lender will let you count rent towards this genuine savings requirement because it’s evidence you’ve been making ongoing payments similar to those you’ll have to make on your mortgage.
Read more about what constitutes genuine savings and how you may be able to use rent payments towards this requirement.
Gifts or one-off payments
Most lenders will also take into account any one-off payment you receive, such as a gift or bonus. If you have a deposit of at least 10% or 15%, they’re likely to be satisfied with this alone and may not ask for evidence of genuine savings.
However, if you’ve received a gift from a parent or relative, they may also require you to provide a signed letter or statutory declaration from the person who gave you the gift specifying that it was unconditional and they don’t expect you to pay it back.
4) Expenses requirements
Before they provide you with a home loan, any lender will also want to have a firm idea of how much money is likely to be leaving your account regularly. To do this, they’ll take into account several factors.
Your living expenses
A lender will want to know what your baseline is for living each month. They’re likely to work this out using one or more of the following methods:
- Self-assessment. Some lenders will allow you to estimate your own living expenses when you apply for a home loan, although based on what you say they may ask for further proof.
- Reviewing your bank statements. A lender may want to see exactly what leaves your bank account each month and where it’s going.
- The Household Expenditure Method (HEM). This formula calculates your likely living expenses based on your number of dependents, where you live, how much you earn and whether you’re applying alone or bringing a joint application.
Ongoing loan repayments
A lender will want to know about any outstanding loans you hold, such as personal loans and car loans. If you’re buying a second home or investment property they’ll also consider your need to meet ongoing mortgage repayments on your current home.
Your credit card limits
Rather than looking at the amount you owe on credit cards, lenders will be specifically interested in your credit card limits. That’s because they’ll base their home loan assessment on you having ‘maxed out’ your credit card and then having to meet the minimum repayments on this balance each month.
That means if you’re applying for a home loan, it could be worth paying down your credit cards and then reducing your limit or closing cards you don’t use.
5) How the purpose of your home loan affects lenders’ requirements
A lender will usually be interested in the purpose of your home loan – that is, whether you intend to live in the home or rent it out as an investment property. They’ll also want to know if you’re refinancing or taking out a loan on a new purchase.
Owner/occupier vs investor home loans
Lenders often have different requirements for owner/occupier home loans and investor home loans.
- Investor loans sometimes come with a lower maximum LVR. For instance, some lenders will only allow an LVR of up to 90% for an investor loan compared to 95% for an owner occupier loan.
- Investor loans are often interest-only loans, meaning you have lower monthly repayments and may be able to borrow more. However, weighing against this, interest only loans also often come with higher interest rates.
- Because you’re renting out your investment property, a lender is likely to consider this income (or at least some of it) when assessing your capacity to repay the loan.
- If you’re using equity in your existing home as security for your investment property, a lender will want to get an accurate picture of how much equity you have and may ask for a valuation of your own home.
If you’re refinancing your existing home loan, a lender is likely to be interested in how much equity you already have in your home as well as your current financial circumstances. If your financial circumstances have changed since you last applied for a loan or if your property’s value has fallen, this may impact on your ability to refinance.
6) Other requirements
On top of each of these conditions, a lender is likely to examine some further information, including:
Your credit score
Your credit score measures your relationship with money and takes into account such things as how often you’ve applied for credit, whether you’ve defaulted and how frequently you’ve met your repayments on loans and credit cards. If your credit score is too low, a lender may decline your loan application.
Whether your circumstances are likely to change
If you intend to take a career break or move to part-time work, a lender may also take this into account when assessing your loan application.
The type of property you’re purchasing
Some lenders may have restrictions on how much they’ll lend for certain properties. For instance, if your property is small (under 40 square metres), has structural issues, an unusual title or even if it’s located in an undesirable neighbourhood, you may find it more difficult to get a home loan.
7) Serviceability requirements for getting a home loan
Home loan serviceability refers to your ability to keep meeting your home loan repayments. Essentially, it’s this that a lender will be assessing when they’re analysing all of the information and data set out above. However, they won’t be looking at this in isolation – they’ll be comparing it to how much you intend to borrow.
Generally, that means the more you want to borrow, the more capacity to repay the loan you’ll need to prove – and the more disposable income you’ll need.
Our Mortgage Calculator can give you an estimate of how much you can borrow and what your likely repayments will be.