Collateral, Capacity, and Character
When I first started in lending many years ago – these were the pillars of any lending assessment made by a bank. And it has not changed.
COLLATERAL
Deposit – or how much skin have you got in the game?
Harder to please when you have less than a 20% deposit. Mortgage insurance rules also impact what can be used as a deposit – with some needing evidence that you have been able to save a deposit or at least be able to meet similar repayments that you will be entering into with a new home loan.
BUT as with all things in finance – there are some lenders who do things differently and have an appetite that varies from others. Family guarantee loans also change the game from a collateral perspective making the lenders much more keen to do business when there is extra security provided to secure the deal.
CAPACITY
How much do you earn? How long have you earned it? And how likely are you to continue to earn it?
It makes a big difference to the banks how you are employed. Basically they are looking for long term stability of income so they can sign off your cashflow to enable the loan to be serviced. So if you are full-time in a permanent position you are considered more stable than a casual worker.
In saying that – there are some lenders who will take 100% of casual income if you have been at the same place for over 6 months. Self – employed borrowers also can have varying assessments placed on them by different lenders. Some use 1 years financials and other take an average of 2 years. But it certainly pays to know what you can use for borrowing purposes before you start looking. We have had clients who have thought they can use one figure – but the bank uses something completely different.
CHARACTER
What is your credit history like? Have you any unpaid or paid defaults? Do you know your actual credit score?
The old story of leopards do not change their spots – does hold some weight when lenders assess clients for a home loan. They look at your credit score and reporting to confirm past history of repayments and conduct. They want to provide credit to those who will pay it back. There are lenders however who do look at “glitches” – losing a job, marriage breakups, illness etc – and subject to a satisfactory explanation to the past issue and that moving forward the credit issue will not repeat itself – they are happy to provide credit (be it at slightly higher rates).
How the banks work out and measure these can differ within their own policies. And unless you are close to them and know what they look for and perhaps what to say to mitigate issues that could be overcome – you may waste a credit enquiry and get knocked back. Too many credit applications can affect your credit report. Banks start to smell something bad if they see too many hits on a report that have not eventuated into anything. And then they look into things even harder.
It pays to have a mortgage professional to work with you to manage the process and get the best solution for you without having to go cap in hand to 3 or 4 banks yourself. No one has time for that! And it could save you thousands if you end up in the wrong loan.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
