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Published March 4, 2024
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What Determines Home Loan Eligibility?

Lenders assess both personal and financial factors to determine home loan eligibility — how qualified you are for a mortgage.

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If you are looking to purchase a property, several factors determine home loan eligibility — how qualified you are for a mortgage

Firstly, you must be at least 18 and an Australian citizen or permanent resident (or in a de facto relationship with one). Then, lenders will assess the following:

Income and employment 

At the top of any lender’s checklist is how much you earn and how secure your employment is. Ultimately, the more you earn and the more secure your position, the better your chances of being approved. 

Standard lending criteria 

Lenders like to see a stable employment history. They require proof of income, typically in the form of your most recent payslips, bank statements and tax returns. They may request a longer history if you are self-employed or a casual worker.

Application requirements 

A lender may ask for: 

  • Recent payslips (within the last 60 days)
  • A record of at least the last three months of income
  • ATO income statement
  • Tax returns.

Don’t think you’ll qualify? 

If you are self-employed, you will usually need to provide a more detailed income history because lenders may assess you as at higher risk than a salaried employee. 

You may consider a low-doc home loan if you can’t produce detailed financial records. With that type of loan, you can apply with different proof of income, such as your:

  • Australian Business Number (ABN).
  • Business Activity Statements (BAS).
  • Bank statements for at least 12 months.
  • Tax returns.

» MORE: How to pay tax as a sole trader

Credit history 

Your credit report shows a comprehensive record of your credit history and overall creditworthiness. This information calculates your credit score, which is a number that represents your trustworthiness as a borrower and shows potential lenders how you have managed debt in the past. 

A lender may deny your home loan application if you have struggled to repay credit cards and personal or car loans. 

» MORE: 9 reasons you can’t get approved for a loan

Standard lending criteria 

Australia’s three main agencies use the following bands to classify credit ratings:

EquifaxExperianillion
Below Average0-4590-5491-299
Average460-660550-624300-499
Good661-734625-699500-699
Very Good735-852700-799700-799
Excellent853-1,200800-1,000800-1000

Don’t think you’ll qualify? 

Your credit score can go up or down. If you are denied a home loan because of a poor credit history, you can improve your score by paying off debt and consolidating outstanding loans. 

Lenders must comply with the National Consumer Credit Protection Act regulations, which protect you as a borrower from being issued credit you cannot afford. 

» MORE: What to do if you’re contacted by a debt collector

Savings and assets  

Lenders will ask for your current savings and assets to get a broader view of your financial position and income history. 

Standard lending criteria 

Lenders ultimately want to ensure you can repay your loan. Assets and savings show you have security as a borrower and could, theoretically, sell assets to ensure you meet your mortgage repayments

Application requirements

Lenders may consider: 

» MORE: How to save money

Debt-to-income ratio and HEM 

Lenders evaluate your expenses and debt-to-income ratio — your monthly expenses and debt compared to your income. A lower ratio means better financial health. 

Lenders will also look at your household expenditure measure (HEM) to estimate your living expenses. Based on a model designed by The Melbourne Institute, it estimates expenditure using age, location and dependents, among other criteria derived from Australian Bureau of Statistics data. 

Standard lending criteria 

Lenders may ask to see bank statements or recent expenses for monthly spending on items such as: 

  • Rent
  • Utilities
  • Food
  • Household costs
  • Childcare.

This information must be accurate and up-to-date to ensure you are taking on a mortgage you can afford. If you are currently renting but plan to move into the property you purchase, consistently meeting your rental payments helps demonstrate you can manage a mortgage. 

» MORE: How much should you spend on rent?

Don’t think you’ll qualify? 

Once a lender has assessed your income and expenses, they will know what you can afford based on your current circumstances. However, your situation can change throughout a mortgage, and so can the interest rate. For this reason, the Australian Prudential Regulation Authority (APRA) enforces a serviceability buffer of 3%. 

This buffer means lenders must assess whether you can afford a mortgage if interest rates increase by 3%. For example, if you apply for a loan with a 6% interest rate, lenders need to test that you can still afford the loan with a 9% interest rate. 

» MORE: How to avoid mortgage stress

Deposit and loan-to-value ratio

Many lenders use a loan-to-value ratio (LVR) to assess risk and determine how much you can afford to borrow when applying for a home loan. LVR measures how large the loan is relative to the deposit, and a high LVR represents a higher risk for the lender. 

Standard lending criteria 

Many lenders use a benchmark of 80% LVR for home loan applications. In simple terms, you need 20% of the property’s value as a deposit. So, if you wish to purchase a property worth $500,000, you would require $100,000 (20% of its value).

Application requirements 

Typically, a deposit will be in the form of cash in your bank account. Alternatively, you can use equity in an existing property as a deposit. 

Having a large deposit will help your chances of being approved for a mortgage, as it means less risk for the lender. Additionally, the larger your deposit, the less you will pay in interest over the life of your loan. 

Don’t think you’ll qualify? 

If you don’t have a 20% deposit, you can still secure a mortgage but may have to pay lenders’ mortgage insurance (LMI). Your lender takes out LMI to insure themselves if you default on loan repayments and the property has to sell for less than the outstanding amount on the mortgage.

Some lenders offer mortgages with a deposit as small as 5%. However, there are usually plenty of terms and conditions attached.

» MORE: How to save for a house deposit

Age and loan term

Lenders will also consider your age and the home loan length when assessing an application. As far as home loan eligibility requirements: a mortgage can be between 20 and 30 years long; the minimum age requirement is 18 years. 

Older applicants may also get denied if a lender is concerned about their earning ability throughout the term of a mortgage. The standard retirement age in Australia is 65-67, and lenders are wary of loan terms extending beyond retirement. So, mature age applicants need to demonstrate that they can make their mortgage repayments after they stop working. 

Don’t think you’ll qualify? 

For borrowers closer to this threshold, you can still obtain a home loan approval. However, you may need to provide more proof of financial means than a younger borrower. This proof could include: 

  • A larger deposit
  • Shorter mortgage with higher repayments
  • More savings
  • High income for the remaining years you intend to work
  • Security on the loan in the form of an investment property
  • Shares/bonds.

» MORE: How long will it take to pay off your mortgage?

Property assessment

When you apply for a home loan, your lender will also require information about the property. This assessment is standard procedure for the lender to evaluate any risk and determine if the loan you apply for matches the property’s value. 

Standard lending criteria

When you apply for a mortgage, the property acts as security on the loan. If you default on your repayments, the lender can sell the property to pay off your remaining debts. A lender assesses the property to make sure it won’t lose value, resulting in a financial loss should they have to sell it. 

Application requirements 

A lender may ask for: 

  • Address
  • Property type (house, apartment etc)
  • Size of the property and the land
  • Price
  • Year it was constructed
  • Sale history.

Don’t think you’ll qualify? 

Many lenders will also have stricter lending criteria for certain areas in Australia that they deem high risk due to factors such as the local economy, flooding, or bushfires. In this case, they may require a higher deposit or lower LVR to approve your loan. 

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