Home loan requirements and eligibility

When applying for a home loan, your lender will need to make sure that you meet its eligibility requirements. Meaning, they need to ensure you’re a suitable candidate for a loan. Home loan requirements can vary from lender to lender, but you can generally bet that they’ll need some key information: your personal details, details about the property, how much you need to borrow and your financial situation.

Personal details

Your lender will need all of your personal information including your full name, your age, your address, and so on. In Australia, you need to be at least 18 years old to apply for a mortgage. While you need to be at least 18 years old, age can be a factor if you’re an older borrower as well.

Mature age borrowers will need to demonstrate that they will be able to pay off their mortgage for the entire loan term. For example, if you’re 60 years old and wanting to apply for a home loan, you may not suit a 30-year loan term. Essentially, whether you’re a younger or older borrower, the lender needs to ensure that you will be able to comfortably repay your loan throughout its loan term.

In addition, you will need to be an Australian citizen or permanent resident to apply for a home loan. You may also be able to apply for a mortgage if you are in a de facto relationship/married to an Australian citizen or permanent resident. If you’re unsure whether you’re eligible, please speak to a loans.com.au lending expert.

Your lender will likely also need to know how many people are applying for the mortgage, whether the borrower/s are in a relationship, and whether you have any dependent children.

Property details

The lender will also need some information about the property you’re looking to buy. This information can include but is not limited to:

• The value of the property
• Where it is located (metropolitan, rural)
• The type of property (house, unit, townhouse, granny flat, studio apartment, tiny house)
• The age of the property
• How big the property is (particularly for units/apartments - the lender may have a minimum square footage required)

Some lenders have restrictions when it comes to what properties they can accept as security on the loan. Homes in metropolitan/suburban areas are usually preferred as they can be easier to sell in the future and they are less likely to lose value. Issues can arise when it comes to rural/small properties as they can be more difficult to determine the value of.

Your financial situation

Lenders need to ensure that a home loan is suitable for the borrower. They will assess your financial situation by looking at a few factors including your income, employment, assets and liabilities, and your credit score.

Income

One of the main factors lenders will look at is your home loan serviceability, which basically means how much you can afford to borrow. They will look at your present income including your gross annual salary, rental income, or any other additional income, as well as your savings habits, employment history and so on.

This allows them to determine whether you can genuinely afford to borrow the amount you’ve applied for. The standard mortgage stress threshold is around 30% of your household income (before tax), meaning your repayments will usually need to be less than 30% of your income.

Employment

Your lender will also look at your employment status. They will look at the duration of your employment, the type of employment (full-time, self-employed and so on) and the industry you work in. Lenders generally need the past three months of payslips along with your home loan application. If you are self-employed, you may not be able to supply these documents, and as such will be required to provide other documents like your tax returns.

You will usually need to have been in your current position for at least six months before applying for a mortgage, but being in the same job for two years can be helpful. This is because the lender can be assured that you will have steady employment and therefore income when taking on your home loan. Self-employed people may need to jump through a few more hoops to be approved for a home loan.

Assets and liabilities

Your lender will also take into account your assets and liabilities, as well as your monthly expenses, to ensure you can manage to take on a mortgage. Assets could include:

• Any other properties/assets you own
• Number of cars/vehicles you own

Potential liabilities could include:

• Existing loans (car loan, personal loan, home loan)
• High credit card limit/s

Your lender will also take into account your day-to-day living expenses such as food, bills, recreational spending and other financial commitments. If your living expenses are high or you have less disposable income, your lender may decide that you can’t afford to manage a home loan. Additionally, if your debt-to-income ratio is too high, as in you have too many other loans/debts, a lender may find that you can’t manage a mortgage too.

Credit score

Your credit score is a numerical representation of your responsibility as a borrower. Some lenders will have a minimum credit score required to qualify for a home loan. Generally speaking, the lower your credit score, the less likely you are to be approved for a mortgage. On the other hand, the higher your credit score, the more likely you are to be approved. You may find a home loan with an average credit score, but typically, you’ll need to pay a higher interest rate and have less attractive home loan features.

How much you’re looking to borrow

Of course, another important factor the lender will need to consider is how much you’re looking to borrow. The lender will generally pay attention to the amount you need to borrow and how this compares to the home’s value. This comes into play when it comes to the loan-to-value ratio (LVR) and potentially needing to pay lenders mortgage insurance (LMI), as well as whether you can afford to repay your mortgage.

Let’s quickly look at an example. Let’s say you want to borrow $300,000 on a $400,000 property. This means you have a deposit of $100,000 and a 75% LVR. Since you have more than a 20% deposit on the home, you won’t need to pay LMI. This is because you could be considered a ‘less risky’ borrower.

With this in mind, the lender will decide whether the loan is suitable for you based on your financial situation, property details and any other eligibility requirements.

If you’re ready to apply for a home loan, chat to one of our lending specialists or see if you qualify today.

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