Home loan requirements
There are a few specific lending requirements by the banks and other financial organizations dealing with home loans. You will be better to know about these new home lending requirements when you look for a mortgage and not fall outside of their guidelines and get your loan application declined.
Every bank in this world, whether it is in the US or UK, Australia or Canada, will have its own home loan requirements that every borrower should know. These are the basic criteria that they use to assess your eligibility for home loan applications and your situations.
There may be a few lenders who will bend the criteria to consider your application on the basis of your merits and not solely depending on the ‘black and white picture’ approach. However, the exception does not make the rule.
Types of borrowers preferred
To start with, you must know the types of borrowers the banks and other financial organizations prefer to offer a loan for their new home. Well, you may look for alternative lending sources as well such as https://www.libertylending.com/ and others that may be a bit liberal in their preference of borrowers but the basic parameters remain the same, however. These are:
Acceptable borrowers are those borrowers that the lenders usually prefer and includes:
- A natural person over the age of 18
- Trustee of a Trust and
- Any combination or multiple of the above borrowers.
There are a few borrowers who are typically excluded by the banks such as:
- Limited liability companies and
- Minors, under the age of 18.
In addition to the above list of traditionally acceptable borrowers, the banks and financial institutions may also consider a specific set of borrowers eligible for a home loan, provided they can build a strong case with the right type of lenders. These are:
- Non-residents: If the borrower lives outside the country or a person is a temporary or a permanent resident in the country but not a citizen, few banks may consider him or her eligible for a home loan, provided the state laws allow it.
- Companies: If in a company all the directors and shareholders apart from the notional directors are able to provide unconditional joint as well as a number of personal guarantees, loans can be offered.
- Trusts: For trusts, if the trustee is a company, to avail a home loan the directors and shareholders must provide unconditional joint and several personal guarantees. Here, the trustee of the trust will be the borrower in its own right always and as the trustee for the trust. This applies to family, discretionary and unit trusts.
- Hybrid trusts: They are usually not accepted for home loan applications provided exceptions does not apply. In such cases the directors of the trustee company will be the borrower and the trust will be the mortgagor. All applications are however assessed on the merits.
- Borrowers of convenience: These are the specific borrowers that have no direct benefit from the loan. They simply add their name in the loan application to ensure serviceability and security but receives no tangible benefit from the loan transaction. They work as a de facto, have marital relationship but are not accepted if they simply provide income support for servicing or added security for another party. However, the exception to this is the guarantor home loan applications.
The loan amount or the maximum LVR usually varies according to the type of the borrowers and the net worth. In case of a joint application where one borrower is a normal citizen of the country while the is a non-resident, the loan application will be evaluated under normal new home lending policy.
In cases were the non-rental income cannot be verified adequately, the available gross market rental income for the security property must be adequate to cover the installments of the proposed mortgage loan. This is evaluated on the basis of the current assessment interest rate and in some cases written evidence that a Foreign Investment Review Board approval is granted may be required.
About the guarantors
Guarantors are ideally required in a home loan application. They need to furnish in full the following:
- Their personal details
- Their employment details
- Their financial position and even
- Sign the Privacy Act declaration of the lender where necessary.
When the income of the guarantor is required to service the proposed loan, standard income policies and employment requirements are applicable. It may also require income and employment verification.
In case of family pledge home loans, sometimes in some states, the guarantor cannot be a pensioner using the owner-occupied property as security for the said loan, however not all lenders will have this requirement.
Debt Service Ratio
DSR or Debt Service Ratio is something that you should know as well. This is a process followed by the banks and other lenders to calculate the percentage of the gross income of a customer and is used to service debt. As a general rule of thumb, any home loan having a DSR that is higher than 50% is summarily rejected.
- For this process, the servicing calculator or the borrowing power calculator is used to assessing the proposed debt repayments and the affordability of the borrower is determined. The calculation is based on the average standard variable rate of the major banks or the SVR or Standard Variable Rate of the lender, whichever is higher.
- In addition to that, there is also an additional interest rate buffer of around 2.25%. This is for covering interest rate movements and any unexpected expenses.
Ideally, the assessment rate should be a minimum of 7.25%. This will ensure that people do not take on home loans excessively if the interest rates are low.
There are several other factors that the banks and financial institutions may exercise while disbursing a home loan, and most of these are at the discretion of the lender. Though they have to follow the governing rules at all times, you are recommended to go through the loan contract to avoid potential risks or non-payment and losing your new home.