Are you in the process of applying for a home loan? Having a good understanding of certain things that lenders look for is highly beneficial. You should know the considerations that lenders look at including your running costs, rental income, and debt-to-income ratio among others.
This article brings forth the important factors that you should know before applying for a home loan. Having this information at your fingertips will help you increase the chances of your loan getting approved.
Rental Income
When processing your application for a home loan, one of the things lenders consider is the rental income that you may get from the property. The lender scales back the money you will get in the form of rental income. However, they will also think of the possibility of the house being vacant for some time.
If the house will be permanently for rental purposes, the lender can scale back the rent to 70 to 80 percent of the actual rent that you will receive. For apartments, they scale back the rent to 60 percent. If it is a holiday let, the banker looks at the property’s rental history for several years in the past.
Generally speaking, lenders can be hesitant to give home loans if you are only relying on rental income. The bank will want to see other sources of income that you will use to pay your mortgage.
Running Costs
Other lenders also put the running costs into consideration when you apply for a home loan. This includes things like maintenance fees, insurance, council rates, strata fees and management fees. When refinancing a current property loan, the lender will look at the existing property expenses. On the other hand, when applying for a new home loan, the lender will expect you to give an estimation of the running expenses. They can also come up with a practical estimate by themselves.
Debt to Income Ratio
The debt to income ratio looks at the amount of your debt as a proportion of your overall income. Lenders use this figure to measure your credit eligibility. The debt to income ratio shows the ability of the borrower to manage payments.
Lenders have different policies on the kind of debt to income ratio that they consider to be acceptable. When applying for a home loan, lenders make a close scrutiny of your debt to income ratio. They pay more attention to this figure especially when they consider home loans to be more risky than the other types of loans.
Will You Improve Chances of Getting a Home Loan By Applying With a Partner?
You could be thinking that the income for two people is better than one when borrowing a home loan. However, it is worth noting that this argument is not always true. Joint property loan applications have a complex assessment process for lenders. There are also pros and cons of applying for a home loan with your partner.
On the contrary, couples discover that they have a higher buying power when applying together than individually. Therefore, they can use dual incomes and combined assets to their advantage. On the contrary, couples tend to have higher debt amounts than individuals. If one of the people has a low credit score or big debts, it can limit the collective borrowing power of the couple.
Reasons for the Denial of Home Loan Applications
When you apply for a home loan, there is no guarantee that it will be approved. There are so many reasons as to why your application can get denied. Lenders may consider your income to be insufficient or your deposit could be too small among other reasons.
Insufficient Income
A lender can assess your income and come to a conclusion that it cannot support your loan repayments. This can lead to the failure of approving your home loan. On the same note, lenders can stop approving a loan of a borrower who has fluctuations in pay or is self-employed. The lenders are more comfortable when dealing with a customer who has a consistent stream of income.
An Unsatisfactory History of Employment
If you change industries or jobs frequently, banks will be more cautious in approving a home loan for you. Therefore, be ready to give more information about your employment history to the bank. Besides, most lenders consider self-employed and contractors to be more risky. People in full time jobs are considered to be safer because they have a consistent salary that is not likely to stop.
Insufficient Deposit
If the amount of deposit that you have saved for the LVR is insufficient, the home loan application will be denied. Most banks want you to have a minimum deposit of 20% of the value of the property. If you don’t meet this criteria, the lender can approve your loan only if you have lender's mortgage insurance.
Over Spending Habits
Overspending is a critical factor banks consider before approving a home loan. Lenders take a look at your bank statement and credit card expenditure to see how you spend and save. If you spend on things likes gambling, the bank will be hesitant to give you a loan
Debt Concerns
Debtors pay close attention to the amount of debt that you could be holding. If your debt to income ratio is too high, the lender may fail to accept your loan application. If you think that your current debts will affect the ability of approving your loan, you can think of consolidating them. You can also reduce the amount of debts before making a home loan application.
Low Credit Score
Borrowers with a low credit score are less favorable for loan applicants. Courses of this include bankruptcies, missed repayments, defaults, etc. If you are not sure of getting a loan approval because of a low credit score, take the necessary steps to improve it.
Incorrect Details in Your Application
You need to disclose all the relevant info when applying for a home loan. If the lender discovers debts or credit cards during the application process yet you have not disclosed them, they can decline your application. They will start asking themselves if you have other debts that you are hiding from them.
Final Thoughts
Even though these factors affect the decision of the lender to approve the loan, not even one of them is absolutely determinative on its own. If lenders see a high risk on you, they will reject your application. Prepare a high deposit to avoid getting an approval of a small loan amount.
The lender also undertakes the Process of MODT before approving your loan. He will look at the value of the property that you wish to buy and your ability to meet the monthly installments. A professional assessment is crucial whenever you are applying for a home loan. If the lender considers you as a less risky lender, he will likely approve your loan application.
