April 06, 2014
Yew Kong Lye
For anyone thinking about making an application for a home loan, it is important that you understand what are some of the most important things that the banks at looking for when they lend you, the proverbial, s…load of money. It is no different from what you would be looking for when you are lending a large sum of money. Banks are always assessing their risk when they are looking to approve a home loan application. The lower the risk, the more comfortable they are about handing out the loan secured by the property purchased.
It stands for loan to value ratio, a percentage measuring the loan value against the value of the property. The value of the property is determined either by the contract of sale or a professional valuer. The banks use this ratio as one of the tools to gauge the level of risk that they are taking on. The lower the ratio, the lower the risk and vice versa.
When you’re lending money to a person, you’ll have more money than cow sense if you lend it to someone of questionable integrity. That is because you have a better chance of sighting the dodo than recovering your debt. Similarly, the bank assesses very carefully who they lend money to.
Before you make a home loan application, pay a small fee and check your credit report. Make sure that there are no surprises. A small dispute with a Telco for questionable charges that had been left unresolved and unpaid could cost you dearly in a home loan application. If the Telco had listed a default against your name, the bank will deem that as questionable conduct on your part. If you know that beforehand and you have a good case, there are organisations out there that will help you remove such credit defaults.
It is imperative that your credit history and your conduct in paying bills and loan commitments are impeccable. The banks are looking for character here. If they sense that you’re tardy with your commitments and being late or missing your repayments, they will classify you as a credit risk and decline your application
Contrary to popular believe, the banks are not in the business of repossessing homes when loans become delinquent. They rather you keep making repayments so that they can make their profits. It is rather troublesome and costly for them to repossess homes.
So, in their assessment process they will ensure that you have the ability to repay the loan. That is demonstrated by your income. They will stress test the income for the loan repayment at a higher interest rate after taking into consideration your other loan commitments and living expenses. If it falls within their risk profile, they will approve the application.
You will be expected to demonstrate some savings when you’re purchasing a home. Though real estate is safe and the banks do lend more against this asset class, they will only lend to a maximum of 95%. You will be expected to make up the 5% plus cost in the form of genuine savings over a period of time as ‘hurt’ money.
I suppose the thinking behind that is that in any business partnership the parties involved need to come up with their share of ‘hurt’ money to demonstrate intent and goodwill. Also, they will make the assumption that if a person can't save on a decent income, the person may struggle to honour the loan repayment commitment.
It is a good idea to understand what the banks are looking for and how they assess home loan applications. That knowledge will enable you to prepare for making the application. You will make better efforts to pay your bills on time, make extra efforts to save more and make sure that your credit history is squeaky clean. “In the end you should always do the right thing even if it's hard.” - Nicholas Sparks, The Last Song
There are many more things that the banks will look for. To understand what they are when you want to apply for a home loan, call 0413 871 888