How to get a home loan?

Your first time applying for a home loan can feel like a significant milestone.  Buying a house is a major purchase—probably one of the biggest you’ll make in your life. A lender will want to know as much about you as possible before approving you for a home loan in order to determine your borrowing power and loan serviceability. This can mean asking you a lot of personal questions about your finances, including current earnings, household expenditure, and any existing debt you hold.

How to apply for a home loan?

There are a variety of lenders that offer home loans in Australia. Most major banks and financial institutions will offer them (provided you meet their eligibility criteria), as will a host of smaller banks, credit unions and non-bank lenders. To give you a rough idea of the level of choice available, there are over 6,000 home loans from more than 80 lenders listed on Canstar’s database. Alternatively, you may consider speaking with a professional mortgage broker, who can assist you in making a choice.

Depending on the lender you choose, you may be able to apply for a loan online, over the phone or in person at a branch. If you’d like to know more about how to get a home loan, as well as the application process that’s involved, you may also be interested in Canstar’s home loan application checklist.

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What is the home loan application process?

As a preliminary step in the home loan application process, lenders will typically ask to see a number of key documents in order to verify your identity and assess your financial situation, in line with Australia’s responsible lending laws. Before you start the process, it can be a good idea to get these documents in order. They will typically include:

• 100 points of identification: typically in the form of a driver’s licence, Medicare card and/or passport

• Proof of income: which will typically include two to three months’ worth of pay slips

• Proof of savings: typically in the form of two to three months’ worth of bank statements.

In addition to this, a lender will likely want to know about any assets you own (like a car), as well as any liabilities (like credit cards or other loans such as personal loans or car loans). Some lenders may also ask to see other documents such as tax returns and credit card statements.

In some cases, a lender will ask you to present a list of your monthly expenses for groceries, bills (like electricity, gas, internet and phone), school and other educational fees, and even things like streaming services. This is often referred to as the Household Expenditure Measure (HEM) and helps lenders get a clearer picture of your disposable income. It can be worthwhile making your own list of these things before applying for a home loan to give you a better understanding of your household’s budget and disposable income.

What is your borrowing power?

Borrowing power is a term that describes the amount of money you might be able to borrow from a lender, based on your financial situation. There is an occasionally-stated rule of thumb that banks and financial institutions may be willing to lend up to three to five times an applicant’s annual income. But there are a number of specific factors that will influence your borrowing power; like your income and expenditures and any debts you might already have. Financial institutions will typically assess each of these when deciding how much they are willing to lend you.

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What factors do lenders consider in a home loan application?

When considering a home loan application, lenders will typically consider your income, employment history, savings, total deposit, spending habits, credit score, and any assets and/or liabilities you may have. While this is not an exhaustive list, these are all factors that most lenders will take into account when deciding whether to approve you for a home loan.

Income

Your income has the potential to greatly affect how large of a home loan a lender is willing to offer you. As mentioned above, lenders will consider your income when determining your borrowing power, as this will give an indication of how much you can afford in repayments. While lenders will generally look more favourably on a high income, this is certainly not the only determining factor in a home loan application.

Employment history

While your annual income will be an important factor in the home loan application process, lenders will also consider your employment history as a measure of your ability to make repayments on a home loan. Generally speaking, lenders tend to look favourably on a consistent employment record. If you have been in your current job for several years, lenders may well view this positively as it signals to them that you are settled and stable, and therefore less of a lending risk.

Savings

In general terms, lenders will look more favourably on your application if you have a demonstrated history of contributing money to your savings. Showing a lender that you have the ability to save can be advantageous for two reasons—firstly, because it signals to lenders that you are able to manage your money, and secondly, because the savings you have will likely count towards your deposit when you eventually purchase a home.

Demonstrating that your deposit is made up of genuine savings that you’ve grown over time can also give lenders more confidence that you’ll be able to afford your mortgage repayments. If you’re looking for a new savings account to help build your home deposit, you can compare savings accounts with Canstar.

Deposit

The loan-to-value ratio (LVR) of a home loan is the loan size as a percentage of the property’s value. In other words, the value minus your deposit. Lenders may have different LVR ranges for various home loans (such as 95% LVR, 90% LVR and 60% LVR), which in turn can determine how much you can borrow and how much of a deposit you will need to have saved.

Say, for example, a lender stipulates a maximum LVR of 70% for a particular loan—this would mean that you need to have at least a 30% deposit saved. A bigger deposit means a smaller LVR, so the more money you can contribute towards the purchase price of a house from your savings, the lower the LVR and the smaller your loan size, relatively. This means you may need to borrow less and may represent less of a risk to a potential lender. In some cases, this may also be reflected by lower interest rates, with some lenders reserving their cheapest products for high-deposit borrowers. Having a deposit of at least 20% (a maximum LVR of 80%) also generally means you can avoid paying lenders mortgage insurance (LMI).

Spending habits

In many cases, lenders will closely examine your bank statements to get an idea of your spending habits, and some may even ask you to provide your credit card statements or an itemised list of your monthly expenses. Lenders may consider how much you spend on living expenses each month, as well as hobbies and entertainment. Generally speaking, an examination of your spending will help lenders form an opinion of whether you live within or beyond your financial means, which in turn can affect the size of any home loan they may be willing to approve you for.

Credit score

Lenders will typically assess your credit score when you apply for a loan. Your credit score is a number that determines how trustworthy you are as a borrower, and is typically measured on a scale of 0 to 1,200 or 0 to 1,000, depending on which credit bureau is calculating the score. Generally speaking, the higher your score, the more desirable a candidate you are to lenders. In general terms, things such as paying your bills on time and making regular progress in paying down debts will help improve your credit score, while bankruptcies, defaults, unpaid debts and multiple unsuccessful loan applications can lead to your score decreasing.

You can check your credit score for free with Canstar or via the Canstar App.

Assets and liabilities

Lenders will also want to get an idea of what assets and liabilities you have before approving you for a loan. Your assets can include cars, stocks and shares, superannuation and any properties you may own already. Liabilities, on the other hand, can include credit card debts, HECS or HELP debts, or any personal loans, car loans or home loans you may already have. You may be surprised to learn that the limit on your credit card can also be a factor lenders may consider. Even if you are up to date on your credit card payments, a lender will still look at your credit card limit as a potential future debt.

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What do you need to get an investment home loan?

If you’re wondering how to get a home loan for an investment property, it can pay to have a good understanding of the specific things lenders are looking for, on top of the things already mentioned above. Some specific things that lenders might consider when you apply for an investment home loan include rental income, running costs and your debt-to-income-ratio.

Rental income

When considering your application for an investment loan, lenders will typically consider any rental income you’ll receive from the property. Typically when calculating this, lenders will scale back the amount of rental income you’ll receive from a property, to take into account the possibility of it being vacant for a period of time. For a house that will be a permanent rental, lenders may scale the rent back to 70% to 80% of the actual rent that will be received; while for an apartment, they will scale the rent back to 60%. For holiday lets such as Airbnb properties, lenders will typically look at the rental history of the property for the past several years.

In general, this means that lenders may be hesitant to loan money for an investment property if you’re relying on the rental income alone to pay the mortgage. Typically, they will want to see some other form of income.

Running costs

Some lenders may also consider the running costs of a property when you apply for an investment property loan. This can include real estate management fees, strata fees, council rates, landlord insurance and maintenance fees. If you’re refinancing an existing investment property loan, it’s likely that a lender will want to see evidence of your existing expenses for the property. Alternatively, if you’re applying for a new investment property loan, lenders may ask you to estimate a figure for running costs, or they may come up with an estimate themselves.

Debt to income ratio

A debt-to-income (DTI) ratio is a figure that takes into account the amount of debt you have relative to your overall income. Lenders will typically use your debt-to-income ratio as a way to measure your eligibility for credit based on your perceived ability to manage repayments. For example, if you have $500,000 in debt (whether it be an existing home loan, HECS–HELP loans, credit card debt or something else) and a gross income of $80,000, your DTI ratio would be 6.25. Each lender will have a different policy on what kind of debt-to-income ratio they consider acceptable, but when purchasing an investment property, lenders might scrutinise your DTI ratio more closely, especially if they consider investment loans more risky than other kinds of home loans.

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Does applying with a partner improve your chances of getting a home loan?

You may well assume that ‘two incomes are better than one’ when it comes to borrowing, but it’s worth keeping in mind that this is not always the case. Joint home loan applications are more complex for lenders to assess than applications from individuals, and there can be advantages and disadvantages to applying with a partner.

A couple may find they have greater borrowing power together than as individuals, thanks to their combined assets and dual incomes. But, a couple could also have a higher amount of debt than individuals, even if only one person in the couple has a lot of debt or a low credit score. This could potentially limit that couple’s collective borrowing power.

What are some reasons your home loan application might be denied?

An application for a mortgage is not guaranteed to be approved, and there are a number of common reasons why your application could be denied. A lender may not feel your income is sufficient, you may not have a large enough deposit saved, or the lender may be concerned by your spending and saving habits, or the amount of debt you already have. Likewise, if your application contains incorrect information, it may also be denied.

Insufficient income

If a lender assesses your income and decides that your loan repayments would make up too high a proportion of it, they may not approve you for a home loan. On a similar note, a lender may be less likely to approve an application if you are a contractor or self-employed with fluctuations in your pay, as they may be concerned that your income stream is inconsistent.

Unsatisfactory employment history

If you have changed jobs or industries frequently, lenders may be more cautious about approving you for a loan, so you may need to be prepared to provide additional information about your employment history. Likewise, lenders often consider contractors and self-employed people to be more of a risk than people in full-time employment, thanks to a perception that your salary may be less consistent in these kinds of circumstances.

Insufficient deposit

If you have an insufficient deposit saved for the maximum LVR a lender is offering on a home loan, then your application may be denied. Note that if you don’t have a deposit of at least 20% of the bank’s valuation of a property, you may be asked to pay lenders mortgage insurance (LMI).

Concern over spending habits

Your spending habits can be another factor for consideration. If lenders look at your bank statements and see that you are not in the habit of saving money, or that you frequently spend on things such as gambling, they may also be hesitant to approve your application.

Concern over debt

A potential lender may be concerned about the amount of debt you have, and if your DTI ratio is too high, a lender might not accept your home loan application. If you have concerns over debt affecting your ability to be approved for a home loan, then debt consolidation may be an option.

Low credit score

If you have a low credit score (perhaps due to defaults, missed repayments or bankruptcies) you may find that a lender looks less favourably on your application. If you’re uncertain as to whether you may have difficulty being approved for a home loan for this reason, there are steps you can take to help you improve your credit score.

Incorrect details on application

It’s important to disclose all the relevant information you can when you apply for a home loan. If lenders uncover credit cards or other debts during the process that you have not disclosed upfront, your loan application may be declined, and questions will likely arise as to whether there are even further debts that haven’t been disclosed.

While the factors mentioned above can influence a lender’s decision to approve you for a loan, none of them is absolutely determinative on its own. If a lender sees you as more of a risk—for example, because of your credit or employment history—then your loan application may not be denied, but you may need to be prepared to pay a higher deposit, or you may only be approved for a smaller loan amount.

Property valuation

Before approving a home loan application, a lender will consider the value of the property you want to purchase, typically by having a professional assessment conducted. If the lender decides that the value of the property is significantly less than what you are proposing to pay, it might deny your application.

This is because the lender may see the loan as too much of a risk, and may be concerned that it will be unable to recoup its losses, usually by selling the property itself, should you happen to default on your home loan.

It’s important to read all relevant documentation, such as the Product Disclosure Statement (PDS) and Target Market Determination (TMD), for any loan product you are considering. As taking out a home loan is a large financial commitment, it may also be wise to obtain professional financial advice before doing so.

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