Will your bank lend you money for a mortgage? Home loan lending criteria explained

Just like with any financial product, there are strict eligibility criteria that a home loan lender sets for customers to meet before they may gain loan approval. This is for your benefit as well as the lender’s, as it is designed to protect everyone from the risk of default.

You shouldn’t need to be a lawyer to understand the terms and conditions around a mortgage, nor should you need to be a broker to determine if a lender will approve you for a mortgage.

There are simple steps that would-be buyers can follow to ensure they are in the best financial position to apply for a home loan. Let’s explore how home loan lending criteria works, and how you can boost your chances of mortgage approval.

What are common home loan lending criteria?

Home loan eligibility criteria differs from lender to lender and is used to help determine whether you are financially capable of servicing a home loan in Australia.

The most important thing to remember about how a lender assesses your ability to service a loan is that they are looking for stability in your personal and financial life. The less risky and less likely you are to default on the loan, the better.

Most standard eligibility criteria are focused around your personal information, your income and any expenses. This may include:

1. Your age – Applicants must be 18-years or older
2. Your residency - Being an Australian citizen or permanent resident is favoured. Separate home loans may be available for foreign investors and those on temporary visas.
3. Your income – For standard home loans, you’ll generally need to provide proof-of-income through PAYG payslips and/or a recent tax return. For self-employed applicants or small business owners that do not have this paperwork, low-doc or alt-doc home loans may be a better suit.
4. Your employment status – Being employed full-time for over 12-months may appear most favourable to lenders. You may still gain approval if you are part-time or casually employed if you can showcase through your income that you can comfortably service any home loan repayments.
5. Your assets – Details of any existing assets may be requested by the lender, including properties you already own.
6. Your liabilities – Details of any existing debts, such as car loans, personal loans or outstanding credit card balances, should be provided to the lender.
7. Your credit score – When you apply for a home loan the lender will perform a hard credit check on your credit history. Borrowers with good to excellent credit scores are more likely to gain approval than those with bad credit.
8. Your deposit – You may need to save a deposit before you gain approval for a home loan. Lenders typically favour borrowers with deposits of 20%, with some lenders offering home loans with deposits as small as 10%. You may find lenders willing to lend you a mortgage with deposits under 5%, but these are typically offered through government home assistance schemes for first home buyers.

How to know if a bank will lend you money for a mortgage

While you may not be able to know 100% whether a lender will approve you for a home loan, ensuring your financial situation is healthy is a good way to hedge your bets.

You may improve your chances of home loan approval if you understand the above criteria and work to boost your financial position. Before you apply for a home loan, go through your finances with a fine-tooth comb. Look for areas in which you can reduce your expenses or boost your income and credit score.

Lenders will take your income, subtract your bills (including the maximum credit limit of your credit cards) and regular expenses, like takeaway meals and subscriptions, to gain an indication of how much you could put towards mortgage repayments. If you have any dependents, this will also factor into how much you can borrow.

Consider getting a copy of your credit history before applying for a home loan and reviewing all the information. It’s not uncommon for credit reporting bureaus to make errors like including others’ information in your file if they are family or have the same name as you. You may even want to work on boosting your credit score before you apply so you increase your chances of loan approval.

If you’ve just signed on to a new role, it’s worth waiting a few months until you’ve left the probation period before you apply for a home loan – even if your income has grown. Lenders look for stability in your income and being employed in one role for at least 6 months may boost your chances of approval.

RateCity offers Australians a Borrowing Power Calculator that allows you to gain an estimating of how much you may be approved to borrow. Simply enter details like those listed above and you may see a range from low to high of how much a lender could approve you to borrow.

Is your current bank more likely to lend you money than a new bank?

Many Australian home buyers may assume that their childhood bank will automatically approve them for a home loan. After all, you’ve been a loyal customer for years. However, this is a common misconception.

As each lender has its own lending criteria, there’s no guarantee that your lender will approve you without you ticking these boxes. Plus, you should try to compare your options to find a lender and home loan that best suits your financial situation and budget instead of sticking with a childhood bank without doing your research.

For example, some lenders specialise in offering mortgages to those who are self-employed, or you may want to sign up with an online lender that offers innovative fintech. And you may miss out on more competitive deals by not shopping around for home loans that better suit your goals, including lower rates, lower fees and more flexibility.

In fact, home loan customers who stay with one bank for 25-30 years are more likely to be hit with a ‘loyalty tax’ than those who shop around for more competitive deals. This is because lenders generally reserve their lowest interest rates for new customers to incentivise them to apply, and because interest rates often fluctuate so better deals may be out there.

If you’re in a financial position to refinance your home loan and stay complacent, you may be charged thousands of dollars in higher interest than if you refinanced, or even just picked up the phone and asked for a lower interest rate.

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