Factors that could affect your Home Loan Eligibility

All lenders have their own specific requirements when assessing home loan applications but there are some home loan eligibility that generally apply across the board. Here are some of the most common home loan requirements and lender preferences to give you a head start in preparing your loan application.

1. The type of borrower you are

Lenders can prefer some types of borrowers over others. Here are some factors they will likely consider:

Your age

You must be at least 18 years of age to be approved for a home loan but at the other end of the age scale, many lenders can be hesitant to lend to older borrowers, particularly those over 55. Just as for any potential borrower, lenders need to assess whether an older person will be able to service a mortgage for the life of the loan, generally 30 years.

Older borrowers may be asked to provide a written exit plan to demonstrate their ability to repay a loan. This may incorporate accessing superannuation on retirement or having enough equity in another property which could be sold if it’s required to pay off the loan. Some lenders may only be willing to offer a shorter loan term, effectively pushing up the regular repayments the applicant would need to make during the life of the loan.

Residency

Lenders will want to know whether you are a permanent resident of Australia or not. However, if you are not a permanent resident, you are not necessarily excluded from borrowing. Many lenders will consider individual circumstances.

For example, non-residents who are married to (or in a de facto relationship with) an Australian citizen or permanent resident will be assessed as a resident applicant by many lenders. For other circumstances, lenders may place limits on the amount that can be borrowed and some may require a larger deposit.

In some cases, applicants might even need to seek the approval of the Foreign Investment Review Board (FIRB).

Situation

Lenders will consider whether you are borrowing as an individual, a company, or a trustee of a trust? Lenders allow companies and trustees to borrow but are likely have different lending criteria in place, requiring specific documentation. Bear in mind too that not all companies or groups are eligible for home loans. Clubs, associations, and limited liability companies (LLCs) cannot have a home loan eligibility.

2. Your employment status

All lenders will closely examine your employment situation to determine if you have a stable source of income. The way your income is assessed will depend on your type of employment.

PAYG employee

If you are a PAYG employee – in other words, you receive a pay slip with tax withheld – you should have a relatively easy time proving your income. But there are a few other factors lenders will examine:

• Type of employment: Are you a full-time, part-time, or casual worker? If you are a casual or seasonal employee, you may face a few more hurdles in being approved for a home loan. That said, some lenders may be willing to consider this type of employment on a case-by-case basis.
• Length of employment: Lenders generally prefer applicants who are employed in the same job for 12 months or in the same industry for two years.

Self-employed

While it is sometimes more difficult for self-employed or sole trader borrowers to provide income documentation, there are lenders who specialise in providing loans to such applicants. In some cases, you may have to apply for a special type of home loan known as a low documentation (low doc) home loan. Without pay slips, you will need to provide alternative documentation to prove your income, such as Business Activity Statements, tax returns, or a letter from your accountant.

Read: How to apply for a home loan as a self-employed borrower

3. Your financial situation

Lenders will assess your financial history, spending habits, and overall financial position when assessing your home loan eligibility. Here is what they will consider:

Income

Lenders assess your income to determine ‘serviceability’ or, simply put, your ability to repay your home loan. Your income helps a lender calculate the size of the loan and repayments you will be able to reasonably manage.

Generally, lenders will ask to see your latest three pay slips (if you are a PAYG employee) to help them determine your average earnings. But some PAYG employees may have other income apart from their normal pay. Other sources of income lenders will generally accept include:

• Overtime: Evidence of overtime over the past two years may be required
• Rental income: Lenders generally accept 80% of gross rental income from any investment properties
• Centrelink benefits: Certain Centrelink benefits, such as child support payments, can be accepted as income
• Fringe benefits: Lenders may accept up to 80% of any fringe benefits you receive such as a stipend, a living allowance, or car allowance
• Share dividends: Some lenders accept a portion of share dividends as income

Credit score

Lenders look at your credit score to assess your debt repayment history. Anyone who has ever applied for a loan or credit in Australia will have a credit score. It basically represents your reliability as a borrower as well as how you have managed your financial commitments in the past.

Even if you have had rough patches in your credit history, there are still lenders who may be willing to lend to you. Some lenders specialise in providing loans to borrowers with lower credit scores or histories of defaults, writs, or court judgements, even discharged bankrupts. While you may consider your credit history relatively uneventful by comparison, it pays to be aware of the ways to improve your credit score before you apply for a loan.

Expenses

Lenders assess your monthly expenses to determine your disposable income, that is, income not devoted to bills, household necessities, groceries, and other spending. Lenders can use different methods to calculate this. The goal is to assess how much you can comfortably afford in repayments.

Assets

Assets include vehicles you own, any shares you have, your superannuation, and any other properties you own or have a share in.

Liabilities

Liabilities refer to any debts you have, which could include credit cards, personal loans, car loans, or HECS/HELP debts. It’s worth noting as part of a credit card debt assessment, lenders will look at the combined credit limit of all your cards (regarding them as potential debt) rather than what amount you owe on them. As such, if you have cards you rarely use, it could pay to cancel them or reduce their limits.

Deposit

If you have been able to save a deposit, it shows lenders that you have financial discipline. Some of your deposit can come from sources like gifts, financial windfalls, or inheritances, but most lenders will want to see at least five percent coming from genuine savings, that is, funds you have held in your account for at least three months.

Having a deposit of at least 20% will help you avoid lenders mortgage insurance (LMI), an insurance you pay on behalf of the lender that covers them in the event of you defaulting on your loan. This can add thousands of dollars to the total cost of your home loan.

You may also be home loan eligible without a deposit through the use of a guarantor, generally close family members, usually parents, who may offer their home or other assets as security for your home loan. This security can serve as a deposit, eliminating the need for you to save one yourself.

4. The amount you are borrowing

The size of the loan you are requesting also affects how lenders assess your application. Here are some reminders when it comes to your loan amount:

• The amount you wish to borrow must not exceed the loan’s maximum loan-to-value ratio (LVR). Simply put, LVR is the percentage of the property value you need to borrow via your home loan to pay for the property. You will need to have a minimum deposit saved, ideally 20% of the property’s purchase price, although some lenders are willing to lend with deposits as low as 5%.
• Make sure that your proposed loan amount fits between the minimum and maximum loan limits imposed by the lender.
• Lenders will perform a valuation of your property to determine how much they will lend you. Lenders generally do not provide extra funds on your home loan for other expenses.

5. The type of property you are buying

The property you intend to buy will be used as security for your home loan. That means if you default on the loan, your lender will sell the property to retrieve the money you still owe them. Because of this, lenders carefully examine the type of property you are considering, assessing the following:

• Location: Some lenders have restrictions on which postcodes they will lend for. Some rural areas, undesirable locations, or areas of housing oversupply may face such restrictions.
• Property type: At a basic level, lenders want to see a property with water and electricity, zoned for residential use, and able to be accessed without driving through someone else’s property. Your lender will also want to know if you are buying a house or a unit. If you are buying a unit, keep in mind that lenders may have stricter criteria. Many consider units riskier investments than houses, especially if they’re in high-density areas, small in size, don’t have good natural light, or generally have limited buyer appeal.
• Size: The property size is usually relevant only to units, with most lenders requiring at least 50 square metres of floorspace. Land size is taken into consideration for rural properties. If a home sits on more than ten hectares, some lenders will not consider it. Other lenders may consider land sizes up to 100 hectares as hobby farms. Larger plots of land could be classified as ‘income-producing’ even if that’s not the purpose of purchasing the property, requiring you to apply for a commercial loan, not a home loan.
• Title: The property will need to have a freehold or strata title without encumbrances. If you default on your home loan, your lender wants to be assured they will be able to sell the property without any restrictions.

6. The reason for purchase

Last but not the least, lenders will want to know why you are purchasing the property as it will dictate the type of loan you can get, as well as the amount you can borrow.

• Owner occupied home loans: If you are buying as an owner-occupier, you are likely to face fewer restrictions and get offered a home loan with a lower interest rate.
• Investment home loans: While investors face tighter lending criteria and higher interest rates, investors can sometimes borrow larger amounts because lenders will assume rental income from the property will help them service the home loan.

If your situation falls outside any of these general requirements, do not be discouraged. Many lenders are willing to adjust their criteria and consider applications on a case-by-case basis. If you suspect your circumstances may fall outside standard eligibility requirements, you may be better seeking the services of a mortgage broker who can help you find a home loan to best suit your situation. Brokers can also advise on documentation requirements and help steer you through the loan application process.

Top owner occupied home loans

The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Important Information and Comparison Rate Warning

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