Not everyone fits the mould when it comes to applying for a home loan, but that doesn’t mean you have to miss out.
The ideal home loan applicant for a big bank is someone who has been employed for a number of years in the same full-time, permanent job, with more than 20% deposit and a perfect credit history.
But not everybody ticks these boxes. In fact, a surprising number of people have more complicated lives than that. And that can make finding a home loan more complicated too.
Fortunately, a range of lenders will consider an application based on individual circumstances, even if you don’t tick all the boxes of an ‘ideal’ borrower.
By working with a mortgage broker, you can look at a range of options, from mainstream to specialist lenders, and see which one is best for your particular situation.
What do lenders look for?
A lender looks at every applicant and thinks about what makes them more or less likely to default on a loan – i.e. fail to pay it back. These criteria can be grouped as:
- Past events – issues like defaulting on a phone contract or missing several credit card payments can raise a red flag for lenders.
- Your future ability to pay – based on how secure and predictable your income is.
- The property you’re buying – how easily could the lender take possession to sell it and pay back the loan, in the event of a default?
When do you need a specialist loan option?
Credit history problem - The most common reason to use a specialist lender is when your credit report shows a history of problems.
Defaults to other financial institutions could mean an automatic ‘no’ for most lenders. However, a specialist lender will take the time to find out the circumstances and may still be able to provide finance. Working with an experienced broker is a big help, if you need to navigate these options.
Specialist lenders may also be a solution if you have debt problems. For example, if you’ve had multiple loans and fallen behind in payments at some point.
While this doesn’t mean you have defaults listed, a poor repayment history can still count against your loan application.
Some specialist loans may have slightly higher interest rates, because the lender is taking more of a risk. However, a common strategy is to take out a specialist product and then switch to a lower-rate product a few years later. By keeping up with repayments, you prove you’re a good credit risk and can therefore access a lower rate.
Some loan products are developed with this in mind, such as Yellow Brick Road’s ‘Renew and Restart’ range. It caters for clients in this situation by minimising entry costs, it provides the perfect stepping stone product back to a mainstream loan.
Self-employed, casual or contractor – If you don’t have a guaranteed income, as you would being permanently employed, it could make the loan harder to get approved.
On its own, being self-employed alone does not always rule you out, however, short-term self-employment or lacking a strong record of financial management can put you in “low-doc” or alternative lending territory. Your broker can advise if this is the case, and how it affects the process.
Self-employment can be less of an issue if you are buying as a couple and one person has a permanent job. However, if you both own a business together, for example, that can make the loan application more complex.
No genuine savings history – If you receive a windfall such as a redundancy payout, gift from your parents or an inheritance, it’s tempting to think it has solved all your home-buying problems. However, lenders want to see more than an ability to attract good luck; they want to see you are good with money.
These ‘genuine savings’ should go back at least 3 - 6 months (depending on the lender). Sometimes regular rental payments can be recognised as a form or savings, however, it’s best to talk to a broker if you aren’t sure.
The 5 C’s of credit
When you apply for a loan, a credit assessor looks at 5 key criteria:
- Character – things like stability of employment, how long you’ve lived somewhere and your credit history.
- Capital – Your deposit and savings history. The larger the deposit the lower the risk.
- Capacity – Your type of income or employment, and how easily can you service (i.e. pay back) the loan
- Collateral – is there a property or asset the lender can repossess if you can’t pay the loan?
- Conditions – What sort of loan do you want? A specific purpose such as a home may be more preferable to a lender than a loan for an unspecified purpose