When applying for a home loan, various factors come into play that lenders consider before approving your application. Understanding these factors can help you improve your chances of getting a favorable loan. In this blog, we will explore how your monthly income, job stability, and other criteria affect your home loan application.
Key Parameters for Home Loan Application
Monthly Income and Borrowing Power
Your monthly income plays a significant role in determining your borrowing power, as it should. Lenders assess your salary in order to calculate how much you can afford to borrow.
Two factors are very important – consistency and reliability of the income. Both increase the likelihood of loan approval.
Additionally, if you have alternative sources of income like bonuses, commissions, and stipends, they can boost your borrowing capacity, landing you better loan options.
Importance of Job Stability
Job stability is crucial when applying for a home loan. Lenders are not solely concerned with the size of your paycheck but rather seek assurance of a steady stream of income.
Even if you have a high monthly salary without proof of employment security, your chances of loan approval are next to nothing. Offering loans to people without job stability poses a risk for lenders, especially if they want more than 80% of the property’s price.
Evaluation of Home Loan Applications
Loan lenders have set criteria to cater to home loan applications based on various guidelines that may vary from one institution to another. Although it is case-specific, yet there are some common factors considered universally.
Here are the three essential elements lenders evaluate:
a) Borrowing Power
Your capacity to borrow is based on your income sources, savings, existing debts, expenses, and investments. The loan providers aim to determine whether you can afford monthly repayments while meeting your essential needs or not.
Lenders assess your disposable income to evaluate the impact of mortgage repayments. Other than that, your spending habits and lifestyle are also carefully scrutinized to ensure they align with your budget.
b) Loan-to-Value Ratio (LVR)
Lenders allow borrowers to take only a certain percentage of the property’s value. The LVR is a risk assessment tool where higher ratios indicate higher risk. Generally, lenders permit borrowing up to 80% of the property’s value.
c) Credit Rating
Your credit is no less than a report card for lenders. The booklet serves as an indicator of your financial credibility. It reflects your ability to manage your finances and fulfill financial obligations responsibly.
Credit rating providers evaluate your credit score based on payment history, outstanding debts, credit history length, new accounts, and credit types. A good credit rating enhances your chances of loan approval, while a poor rating may result in rejection.