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How mortgage lenders assess an application

Friday, January 19th, 2018

 

 

One of the least-comfortable parts of obtaining a loan is having your financial activities under the scrutiny of sharp-eyed mortgage lenders examining your application.

Because each lender will have their own methods for weighting the factors they use to measure applicants, there are no definite criteria on how mortgage lenders judge their clients. Even though this can make homebuyers anxious, the metric secrecy is for good reason as to prevent any fraud and manipulation.

Even if the benchmark differ slightly from lender to lender, there are some things that they generally look into to check the credibility of their applicants. Here’s a list of the factors lenders use in profiling their clients:

1. Borrowing power.

A buyer’s capacity to afford monthly repayments while still having enough cash to spend for daily life is what matters most to mortgage lenders. They won’t give away loans to just anyone, especially those they deem incapable of paying back what they owe. Banks have the responsibility to see through the lifestyle and resources of their prospective borrowers and have the right to refuse them the loan if they see that the borrowers would be unduly burdened by the debt.

In measuring the borrowing power of their applicants, lenders would often look into their annual, monthly and/or disposable income. More often, banks are willing to give 3-5 times the amount of the applicant’s gross annual income. With that information at hand, the monthly mortgage payment can then be the percentage of the borrower’s monthly income or disposable income.

2. Low to Value Ratio (LVR).

Defined as the percentage of the loan value against the value of the property, it is a risk assessment lenders and financial institutions will always employ. When the application is considered to be high LVR (greater than 80%), the perceived risk of the loan going into default increases, as the loan is getting close to the appraisal value of the property. As such, the lower LVR the application, the more attractive the application becomes. Lenders do not want to repossess properties because it would be taxing for them to sell it off in the market due to the time and effort it takes to do so.

3. Collateral.

Even if lenders are willing to give borrowers a hefty amount of money for their real estate, they want to make sure that they are not the only one who has something to lose. They will sometimes ask for something in return to know that they are dealing with a reliable and trustworthy client.

It can be in the form of the property that you are planning to buy, other lots (if you have any), or funds that you have kept in your savings account. Should the worst case scenario happens, lenders would not be in losing end of the thread because they have some of your assets as payback.

4. Credit rating.

Also known as a FICO score, this is an important factor in an application, as it represents a summary of the applicant’s credibility with regards to their finances. It determines whether or not the borrower can carry the responsibility of paying monthly repayments for a number of years.

A credit rating is comprised of the following factors:

  • Payment history (35%). Lenders want proof that borrowers can take on the obligation to pay up every month without having to miss payments or default on any types of debt. While having some blemishes will not stop lenders from granting you the loan, they will be on high alert and could offer you a smaller amount of money with/or a higher interest rate compared to a standard home loan.
  • Outstanding debt (30%). The less debt you have, the more likely you will be approved for a loan.
  • Length of credit history (15%). The duration over which you have used credit will also be probed.
  • New accounts (10%). Lenders are wary of occasions where borrowers have opened a bunch of new credit accounts at a rate that is unusual.
  • Types of credit used (10%). The borrower’s right use of credit (whether it be credit cards, car loans, etc) is a huge plus on the lender’s books. It indicates that their clients have experience juggling different kinds of financial situations and is reliable and organized enough to take on such commitments.

5. Fiscal character.

The applicant’s way of life will be closely examined during the assessment process as it is a good indicator on what kind of a borrower he/she is. By looking at one’s bank statements, lenders will have a bird’s eye view on the spending and saving habits of the borrower.

Sure, there are some expenditures not monitored by the bank such as groceries and gas, but the withdrawal and deposit activities can be a good starting point.

Here are some of the things lenders look out for:

  • Lifestyle. Different aspects of your life will be evaluated by the banks to ascertain what kind of lifestyle you lead and if it is within your budget. Your social life, travels and even hobbies can be questioned as it all involves spending. If you have a gambling problem, that can ruin your chances of getting the loan.
  • Expenses and spending habits. Your monthly expenses and on the side cash outs would also be scrutinized. If you are prone to spend too much above your means and is often under a credit card debt, banks may be wary to give you a loan.
  • Debts. Banks like to know if you have other financial commitments such as personal loans, credit cards, student loans, and insurance. This is because the loan would add up on your monthly expenses. They want to make sure that you can afford paying for all of your debt before approving your application.

Keep in mind this is just a comprehensive guideline and may not entirely cover your experience with the filtering process.

By Maera Tezuka 

Author: Lynne Cox

She is a Mortgage Broker and holds an Australian Credit Licence # 365386. She has been involved in the Mortgage Broking Industry since May 1996 but has been involved in small business since 1977. Lynne is a licensed finance broker. She was the President of the Finance Brokers Association of Australia until March 2004 where she is now a Life Member, and she was also a Member of the Finance Brokers Supervisory Board until it disbanded in October 2003.