The 5 Criteria Banks Use To Assess Home Loans and Investment Loans
Learn how to get your home or investment loan approved fast. I’ll explain the exact 5 criteria banks use to assess loan applications. I’ll also include proven strategies to help you save time, interest, tax and maximise property investment opportunities.
Take the guess work out of loan applications by understanding what lenders are looking for.
This step-by-step guide explains each criteria for credit approval in detail, providing examples of what to do and what not to do. By the end you’ll understand the practical ways you can strengthen and fast-track your loan applications.
How Does A Bank Assess Your Loan Application?
If you’ve ever applied for a loan or pre-approval, you’ll know the process goes something like this:
- Make an appointment with your mortgage broker
- Bring in your pay slips, tax returns, bank and credit card statements and other paperwork
- Sign some forms and wait for an answer
If your mortgage broker knows the basics and you’re getting a simple loan, the application is likely to come back approved. If your mortgage broker doesn’t know what he’s doing or if your situation is slightly more complicated and you’re dealing with an inexperienced mortgage broker, you may get bad news “sorry, your loan has been rejected by the bank” or “we need more information” causing your loan application to drag out.
This whole loan process is often shrouded in secrecy and if you’re unlucky enough to get your loan rejected, it’s often hard to know why that’s the case.
So how does a lender come to their decision of whether to approve your loan or not?
The best way to think of it is like a job application. Before you can get an interview and land your dream job, you’ll often be asked to hand in a written resume. A HR manager or your potential boss will decide whether to invite you in for an interview based on what you’ve written in your resume and how you’ve presented your experience and skills in that document.
Your Loan Application Is Like A Resume.
The banks don’t know anything about you other than the information you provide in the loan application.
You might be a hardworking and honest person who knows that you will always make repayments on time. However the banks will only assess you based on what you’ve included in the loan application and how you’ve presented your application.
How to package your loan application to ensure your loan gets APPROVED, and FAST!
For any loan, be it a home loan, investment loan, car loan or business loan, the engine driving all financing decisions is the so-called ‘5 Cs of Credit’: character, collateral, capacity, capital and conditions!
Lenders including all the banks use these 5 key criteria to assess your loan application and decide whether to stamp your loan ‘APPROVED’.
An experienced mortgage broker understands this and will use these 5 criteria as a checklist to prepare loan documents, in the same way that a lender’s credit manager will use the 5 things to decide whether to lend to you.
A Mortgage Corp loan specialist goes a step further as he/she knows the ins and outs of the loan criteria and lending process. They’ll strategically package your loan to maximise your borrowing power, save you interest and tax, and help you build a more profitable property portfolio in less time.
1. Character (Your Financial Stories)
It’s Like The Cover Letter To Your Resume!
Your character is the first thing a lender looks at when assessing your loan application. It is essentially your financial history – by looking at your past behaviour with credit, the lender will get an idea of your ‘financial character’ and whether you are likely to meet the repayments on your loan.
A lender will first obtain a copy of your credit file (they need your permission first, but it is usually a prerequisite in any loan application once you have signed the privacy declaration form) and compare this against the details in your loan application.
A credit file is usually supplied by a company such as Veda or Dun & Bradstreet (DnB), which stores important personal and financial information such as:
- Your name, current and past addresses, date of birth and drivers license number
- Details of your past and current employer
- Any applications for credit you have made in the past 7 years or more including credit cards, phone contracts, personal loans and mortgages – even unsuccessful applications are recorded or ongoing check by banks that you hold a credit card with
- Details of late payments and defaults
- Bankruptcies or judgments
- Records of directorships and ownership in companies
- And finally, your CREDIT SCORE.
By looking at this information, lenders can work out whether you have ‘good’ financial character and whether your application can proceed. They will look at things like:
- How stable is your employment?
- How stable are your living arrangements? Have you been moving around a lot?
- What type of loans have you applied for in the past?
- Did you miss any payments on these loans?
If your credit history shows stability and consistency, for example, you’ve got a stable job and have been diligent with credit card or loan repayments, then you are likely to score highly on the character aspect.
A young first home buyer (let’s call her Joan) came to us seeking a loan for her first home. She needed to borrow 95% of the purchase price. Because this is a very high loan to value (LVR) ratio, it was likely the bank would only lend to her if she could establish a clean record that could satisfy the ‘5 Cs of Credit’ including showing that she had a good character.
We asked Joan about her employment history and here is what she told us:
- She had been working in a retail store for 3-5 years part-time whilst studying at university
- She had a period of 5 months where she was unemployed recently
- She had just started a full-time job in HR and is currently on probation
If Joan had walked into a bank branch or spoken to an inexperienced mortgage broker to apply for a loan, there would have been a high chance she would have been turned away. Why? Because a bank manager or an inexperienced mortgage broker would look at this information at face value and tick “NO” for the following basic criteria:
- Owns another property (x)
- Less than 95% LVR (i.e. the highest lending ratio) (x)
- The applicant needs to be in their current job for 3-6 months (x)
- The applicant must not be on probation (x)
- The applicant needs to have 2-3 years of relevant industry experience (x)
- 5% genuine savings (x)
They may also be concerned by her period of unemployment and wonder if her full-time job is actually stable.
If Joan’s application had been submitted on the above facts alone, it probably wouldn’t sit well with lenders.
But Mortgage Corp was able to get Joan’s loan approved. This is because the story we presented to the bank better portrayed Joan’s character.
In the loan application, we explained to the banks that Joan was working part-time in retail while studying a HR undergraduate degree and Master’s degree. The reason she didn’t have a job for 3 months was because she was applying for jobs and attending interviews for jobs relevant to her degree. She successfully managed to get a job in her industry and although she was still on probation, the probation period was only for 6 months and we requested a letter from employer stating all was in order for her to continue subject to completing the 6 month period.
Joan also happened to be only one of two applicants on the loan (the other applicant was her husband). As her husband had been in his job for a few years, this also supported the application. Though her income was needed to get the loan over the line, therefore reliance on her income was important enough to sway the application either way.
This is just one example of how painting a good character makes all the difference!
Note: for privacy reasons, all names used in this guide are not real client names.
How to put your best foot forward
You can do a few things to make sure that the information lenders see presents a favourable picture of your financial character.
- Check your credit file – First of all, get a copy of your credit file or sign up to a credit watch service directly. It’s important to get this information from a trusted provider such as Veda or DnB as you don’t want your private information falling into the wrong hands.
Check the details – for example, is it showing that you’ve defaulted on a phone contract when the amount is really under dispute? Make sure any discrepancies are investigated and corrected before submitting your loan application, otherwise your application could be delayed or worse, rejected.
- Keep up with payments – it might sound obvious but it’s important to always pay your bills and loan repayments by their due dates. Even small unpaid overdue amounts on a phone bill will make a lender less likely to approve your loan. It’s like they say with a job – do the small things right to prove you can handle bigger tasks!
- Paint a picture of stability – because banks believe that stable employment means you’re more likely to repay your loan, your application will be looked at more favourably if you’ve stayed 3-5 years in a job or in the same role/industry, compared to if you’re changing jobs every couple of months. It’s worthwhile to show that you can hold down a job in your industry and that your job isn’t subject to a probationary period.
- Don’t apply for too many loans at one time – Whilst it’s tempting to ‘shop around’ for the best deal on a loan, it’s important not to submit multiple loan applications for the loan. Lenders will look at how many credit applications you’ve made in the last 6 months, 1 year and 3 years.
Don’t let a mortgage broker submit multiple applications to multiple lenders at the same time hoping one of them will lend you money. And don’t run around to different banks asking for approvals – this won’t help your cause.
Lenders will immediately spot all these applications on your credit file and this will raise a red flag – they will wonder why you’ve needed to apply for so many loans and whether you have been knocked back by multiple lenders. A good broker will only submit your loan application to the most appropriate lender to ensure you don’t tarnish your financial character to improve your loan approval chances.
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About Mortgage Corp
Based in Mount Waverley, Mortgage Corp is the most trusted mortgage broking firm in Melbourne with consistent 5 star customer reviews. Mortgage Corp specialises in helping successful professionals and property investors maximise their return and strategically structure your loan for long term investment success.
While most banks and brokers focus on merely getting you a loan, Mortgage Corp is committed to getting you a comprehensive investment result. Request a Free Loan Strategy Session with our senior mortgage strategist Neil Carstairs today!
Mortgage Broker’s service is free, why not get a good one ? Mortgage Corp consistently receives 5 star customer reviews! Click here to find out why
About Neil Carstairs
Neil is the founder of Mortgage Corp, an active property investor and awarding winning MFAA accredited finance broker with more than 10 years’ mortgage broking experience. Currently, Neil is one of only 19 MFAA Certified Mentors in VIC/TAS region.
He is known for his strategic approach to investing and ability to reach fast, successful outcomes for clients where his industry peers could not. Connect with Neil on LinkedIn.