There’s much more to home loans than many borrowers expect. With a lengthy list of factors that are used to qualify customers for loans, the average bank or credit union uses many tools while it judges applicants for loan suitability. These can vary from income levels to assets, and are enough to drive the average consumer insane in their depth, level of data, and long-term loan implications.
The assumption amongst borrowers is that loans are largely linear in their interest rates and levels of fees, with each and every borrower paying an even slice of their loan back in the form of interest. A nice thought, it’s fairly far from the truth. Banks use a variety of metrics not just to qualify people in loan applications, but to decide what they’re able to borrow, and how much they’ll need to repay.
This mean that every piece of information you make available to your lender, be it a pay slip or the contents of your current accounts, is going to be used in order to assess, judge, process, and design your loan. It means that all of your banking and asset holding information is going to form the rate that you’ll repay in interest, the fees that come with your loan, and even your financial future.
In this guide, we’ll look at how you can qualify for home loans, even when your credit history and current asset level doesn’t exactly push the qualification directly towards you. We’ll also look at a range of key factors that banks look for when issuing home loans, the recent history of home and residential lending, and how you can get the best deal possible on your home loan or mortgage.
At the heart of risk assessment and home loan qualifications is one measure – a measure that’s used to reflect and make clear your long-term borrowing history. It’s your credit score, and it’s used by an immense range of lenders to assess the risk involved in lending money to you, and the implications of conducting a long or short-term loan with you. It’s also of key important for mortgage borrowers.
Why? Because banks see it as an indicator of trust. There’s little correlation between how someone thinks they’ll repay a loan and how they actually will. There’s even less correlation between abilities to repay a loan. As such, banks and major lenders need to rely on your history, and this history can be found in your credit score, along with some other slightly less important metrics.
As such, building a good credit score should be the focus of your spending and borrowing in the years leading up to your home loan application. Very few people buy their homes ‘on a whim’, so planning ahead and building up credit needn’t be particularly difficult. With a score below about 600, you’ll be unable to even speak with a bank representative at many major lending businesses.
However, build that score up through smart borrowing and small, affordable loans, and you’ll be able to command the respect and attention of even the surliest loan officer. Credit history it at the heart of the banking system’s loan and risk management assessment. Improve your credit history and you’ll significantly cut down the amount of red tape you need to wade through for a loan.
Beyond your credit score, there are a number of other factors that can influence your ability to qualify for a home loan. While slightly less important than your credit score, these are still key factors that can swing proceedings in your favor. Chief amongst non-historical aspects is your current assets, their value, and their liquidity in the event that you’re unable to make a payment.
You see, banks are looking to minimize their risk when issuing loans. By working with individuals that have a great deal of assets, particularly assets that can be sold for cash relatively quickly, they increase their chances of having timely, constant repayments. If you have a great deal of valuable assets, you’re more likely to qualify for a loan at a higher lending volume and lower interest rate.
Beyond this, your salary and its stability will come into the equation. Employees are likely to be assessed based on their monthly salary and lengthy of employment, as in cases where long-term employment is the case it’s unlikely that stability will be an issue. If you’re applying for your loan with your spouse or partner, their income will also be assessed, along with the value of their assets.
Finally, the amount of money that you would like to borrow has a major role in determining your success as a loan applicant. If you plan to have repayment levels that exceed forty percent of your combined monthly income, it’s fairly likely that your application will be denied. Generally, banks want you to borrow modestly, limiting the risk of a default and making your repayments simple.
With the right combination of past borrowing history, a strong recurring source of income, and your own liquid or non-liquid assets, acquiring a home loan needn’t be a difficult process. In fact, with an expert strategy and long-term borrowing history, it’ll be a breeze. Apply with your new knowledge of the lending industry backing you up, and enjoy your newfound pride in being a homeowner.