How To Have Your Home Loan Approved
No matter what type of loan you are applying for, it pays to be prepared when it comes to application time.
There are many different types of credit to apply for, such as home loans, personal loans, car finance and credit cards. Whilst each type of credit is different, the approval process is actually quite similar.
When assessing your loan application the lender will be looking at certain factors to decide whether or not to approve your loan. By knowing what these factors are you can improve you changes of receiving a positive result.
1) The Four Cs
Within any bank or finance company there will be a group of people whose job it is to assess loan applications. Whilst much of the work is now done by computers, there will always be a human element involved in the approval process.
Whether it’s a person or a computer assessing your application, or in most cases a combination of the two, they will always be looking at the Four Cs of lending. These are character, capacity, capital and collateral.
Your character includes factors such as your stability and credit history, whilst your capacity relates to your ability to make repayments. Capital relates to your overall financial position, and collateral is relevant to secured loans such as mortgages and car finance.
Banks and finance companies love stability. Their ideal loan customer should have a stable history of employment and residential status.
If you have changed address or employer many times within a few years, it may be a good idea to stabilise these factors as you prepare to apply for a large loan such as a mortgage.
In terms of employment, most lenders will want to see that you’ve been with your current employer for at least six months if you are a permanent employee, or twelve months if you are a casual employee. They will also be more favourable if you have remained within the same industry.
3) Credit History
Your credit history is of major importance to any lender. Ideally you should have no blemishes on your credit report.
If you are unsure of the state of your credit report, it is a good idea to obtain a copy of your report before applying for a loan. This way you can address any issues within the report and hopefully have them rectified prior to the lender running their own report.
4) Borrowing Capacity
No matter how good your stability and credit history is, any lender will be unlikely to lend you money if they suspect that you cannot afford to make the repayments.
Before applying for a loan you should use a borrowing capacity calculator to see how much you can borrow. If you fall short of your target, you will need to lower your loan amount or increase your income. Either way, it is better to address this issue prior to applying for the loan.
5) Financial Position
Your overall financial position essentially involves tallying up all of your major assets and subtracting any debts that you have. The lender will want to see whether or not your overall position matches your age and your employment history.
If you have been in the workforce for a long period of time with a decent income, the lender will want to see a decent level of assets. For those who have been in the workforce for a lesser timeframe, the lender will know to expect a reduced financial position.
Collateral is only relevant when you are obtaining secured finance to purchase a home, vehicle or other major asset.
Essentially the bank wants to know that you are spending their money prudently, and that the asset is of sufficient quality so that it can be easily sold if you get into serious trouble with your repayments.
7) Be Prepared
Ultimately, the banks and finance companies would rather approve loan applications than decline them, but they have to be careful to ensure that they are lending money to the right people.
By knowing what the lenders are looking for and preparing for it beforehand you can improve your chances of having your loan application approved.