Before we kick off it’s important to remember two things:
Banks have a policy that dictates what it can and can’t do, but also, lending money is high judgemental; and
There are somewhere in the realms of 10,000+ home loan applications weekly. Yes weekly, so if you don’t stand out from the pack as the best place to park the bank’s money, then be warned, it could be a no go.
1. They look at your income
Income is the first item the bank looks like. Why? Because it’s most likely the way your loan will go from the highest amount to zero. It’s important for the bank to understand your income in detail, it’s the primary factor in lending. So what do bank’s care about with respect to income:
- How much is your income, the total amount does mean something. Yes, bigger is better, the more you earn the more monthly cash flow you have to handle a larger mortgage.
- How consistent is that income? Is it paid on time every time? Is it a job, where you always get paid that wage or are you self-employed and income flies around like superman…
- If you have a job, what’s your pay structure? There is a different risk for lending to a full time, part-time or casual employee.
- How variable is that income? Is your income a base solid wage and doesn’t change, or is the variable like a commission, bonus, overtime. The more your income is variable the greater degree a bank may shade your income to be conservative. Some examples are:
Rental income gets shaded by 20-25%
Overtime, commission gets shaded by 20%
Annual bonus income, they take the lower of two years and shade it by 40%
- How long have you be earning this income? Did you just start a job within probation or been earning this coin for yonks? Is your business profit as high as it has ever been or its stable year on year?
Once they take everything into consideration, they provide a final figure they are willing to go by. By the way, take our super from the equation as that amount can’t be used to repay a loan!
2. They look at your expenses
- Next in line is your expenses. So you earn $3,000,000 bucks, it’s pointless if you spend $4,000,000 a year.
- Historically expenses have been a carefree endeavour, however, more recently banks will deep dive into your expenses like a scuba to figure out where your money is going. With the soon to be announced changes in responsible lending, this may ease.
- A bank starts off with an index they use to determine the minimum amount your style of household should be spending a month. This is based on the number of people, gross income, and living area.
- It then looks at your last 6 months’ bank statements and picks apart where your salary has come into, and where it goes. They follow the money trail until it hits your ‘savings’ pile which they hope is going up.
Remember: If you are not savings each month, why would a bank give you money that has to be repaid each month.
3. They look at your credit score
Yes, that pesky credit score provides them a baseline measure of you versus other applications they can approve. Anything below 600 becomes a bit tougher to get approved, so keep monitoring this. Here is our blog on credit scores and tips to improve them.
4. They review you account conduct
It May not seem like much, but overdrawn and negative account balances are a big no-no. You need to show the bank you are an adult, that checks his accounts and cleans them up when required. Keep money in all your accounts, or having a system of savings and spending is critical to the bank assessment process. They think if you cant keep your accounts in order, why would I add another loan to make it more confusing…
5. They review all your documents
Oh boy, you will provide them with documents galore. They will check these to ensure everything is true and correct. They check these for:
- To ensure the information in your application matches a source document
- To track your spending
- To run their credit checks
The better your documents i.e most up to date, easy to read, scanned straight – will make the job of the bank manager much easier.
6. They review what you are looking for against their policy?
Banks have internal policies on how to lend to an individual. These policies are driven by the big honchos that work there and determine how a bank attracts clients and grows its business.
- Do they want to have more doctors on the books? Then make a fancy medical policy.
- Do they want more business clients? Have a more lenient self-employed process.
- Are they happy with the risk of maternity leave? Have a policy to allow for it.
Policy is such a hidden mind field and can be the single biggest factor for your approval. So go seek a Mortgage Master (mortgage broker) out and let that hero do his/her job!
Some key things they review are:
- Is your scenario valid
- Are your contribution enough
- Do you have the right income / expenses to support this
- What’s your deposit
- What’s your credit score
It’s really a summary of the last 6 points, with any quirks added on top.
7. They look at your assets
We’re now moving into the long term view a bank takes on you. They want to see how you have built up your asset base over time. Where has your income been parked to help grow your wealth and protect you in the worst-case scenarios.
There are a few assets like cash and property they are most interested in, as these will form a part of your deposit towards your purchase, so make sure you have all your details such as:
- How much savings do I have?
- How much super do I have?
- Values of my property(ies)
- Values of my cars?
- Value of my personal contents?
- Value of any shares?
This is your time to show off to the bank, make sure your application has as much info in it as possible.
8. They look at your liabilities
The second part of the long-term view is your liabilities. A liability is something you need to pay off… and now you’re wanting a home loan to pay off too. Hmm, the bank gets nervous when looking at liabilities but they want to know them all. Key ones we see are:
- Credit cards are seen as big liabilities
- Car loans, personal loans
- HECS/HELP or student debt
- Other property loans
- Investment loans
- Business or tax debts
- Share margin loans
A bank wants to know the terms of these loans too including; the loan limit, balance, repayment, interest rate, and term (how long you have left to pay).
9. They sense check you through ratios
Finally, the sense check. You made it! The bank needs to use the ratio to determine where you sit in its approval threshold. Here are some key ones to potential run over your own scenario:
- DTI – debt to income. Take all your loan limits and dived it by the gross income (excluding super).
- LVR – loan to value. This is specific to your purchase structure, how much loan is there against the value of the property.
- Loan term to age – generally home loans are given for 30 years. At the end of the 30 years, how old will you be? If it’s too old there may be a risk issue.
- Age to assets – Take all your assets divided by your age. Essentially how well have you done from a wealth point of view?
These are just a few of the bank’s internal ratios it uses to help determine yay or nay!