| How Home Loan Applications are Assessed
Gaining an understanding of how home loans are assessed can give you a significant advantage when preparing to apply for one. There are three key factors lenders consider as part of the lending process: capacity, character, and collateral.
Capacity (The first C) This involves evaluating your ability to repay the loan. Lenders will examine your income and expenses in detail, including your current and historical employment. Stable employment history is crucial, while casual employment is usually not considered stable. Other income sources, such as side businesses or income-producing assets, may also be taken into account. Your expenses will be closely scrutinized, including living expenses as well as lifestyle and associated expenses like eating out, clothing, sports, subscriptions, etc. It’s best to reduce credit card limits before submitting your loan application to present a lower risk to the lender.
Character Character is all about stability and trustworthiness. Your credit and employment history will be investigated, regardless of your deposit size or apparent income levels. Demonstrated, stable employment is highly valued, as is a good credit history with a record of timely payments, paying off debts, and responsible use of credit cards. Honesty is also essential to building trust with the lender.
Collateral Collateral refers to what security you can offer if you default on the loan. This is about reducing your loan to value ratio, and the lender will conduct a “bank valuation” to ensure they can recover their losses if you default. A larger deposit reduces the loan to value ratio, providing the lender with more collateral.
While each lender may have slightly different criteria, it’s important to be prepared for detailed scrutiny of your full financial profile. By understanding the 3 C’s of lending and how they impact your application, you can position yourself for success in securing a home loan.
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