What banks look at for a home loan?

Banks will often check for any salary credited to your account in the past three months. This can go a long way towards establishing that you receive a regular, steady income. They may also look at your transaction history for the past three months. 

Banks may also take a very close look at your bank statements going back up to 90 days. This provides them with information about your expenses and helps them assess how much of your income can be used to pay off the loan and whether you can reduce expenditure if there is a shortfall in income. If you’re self-employed, banks will likely look at your recent tax returns to assess your home loan serviceability.

Lenders may ask you to set aside 20 per cent of the deposit before they approve your home loan. If you don’t have a 20 per cent deposit, you may have to pay Lenders Mortgage Insurance (LMI). Professionals such as doctors and lawyers may only need to pay a 5 per cent deposit with no LMI, as lenders perceive them as low risk on account of their income and the stability that their profession offers. 

Before extending you a home loan, lenders look at all your assets and liabilities to understand whether you can repay the loan. Your liabilities will also show through your credit report; a record of all your loans and credit cards.

Credit reports include data on any credit or loans that you’ve applied for, as well as any defaults, which are instances where your payments have been overdue for 60 days or more. Defaults can be listed on your report for five years after they’ve occurred and seven years in serious cases. Lenders will also consider bankruptcies, which could be on record for up to seven years after the event. They will look at court judgments and agreements made to pay off debts, which could stay on record for up to five years.

If you’re aiming to get your loan pre-approved, lenders will need to look at a valuation of the property you wish to purchase. Lenders undertake a valuation to check if the home will work as collateral for the home loan you’ve taken from them, especially from a Loan to Value Ratio (LVR) perspective. The LVR is the loan amount as a percentage of the home’s value. It is calculated by dividing the loan amount by the value of the home.

If you’re paying off multiple debts, you could consider reducing your debt to income ratio before you apply for a home loan. Reach out to your lender and other banks to informally check their specific requirements for home loans before formally applying. This might help you plan better and gain a competitive offer that works for your personal financial circumstances.