4 key criteria lenders use to assess your loan application
While methods to assess loan applications can vary significantly, there are 4 key criteria lenders generally use to determine whether a loan application should be accepted or rejected.
The 4 main criteria lenders typically use to assess investor loans are:
- The loan-to-value ratio is the size of the loan that you’re applying for, compared to the cost of the property. For example, if you apply for a $400,000 loan on a property that costs $500,000, that is an 80% loan-to-value ratio (LVR).
- Therefore, investors will have to provide a deposit, such as equity from another property or savings that they have in a bank account, or a combination of the two. Most lenders are happy to lend at an 80% LVR, but only a smaller number will lend at 95% and then almost always with the payment of mortgage insurance by the borrower.
- An investor’s serviceability will vary dramatically from lender to lender as companies calculate this differently, but it essentially takes into account your income against your outgoings, including debt repayments. Serviceability is tested by lenders to ensure loan applicants can meet their repayments.
- Lenders will look at your credit report to determine if you’re financially responsible, i.e. you can adequately manage your money. If you’ve overdrawn your savings or credit accounts or have missed a deadline to pay a bill then this may adversely affect your ability to secure a loan.
- If you’re borrowing against your home or an investment property, the type and location of the property will affect your loan application. ‘Riskier’ assets, such as inner-city apartments in high supply areas, can limit the amount you can borrow.
It’s interesting to note that the amounts each lender may be willing to lend to a borrower can vary significantly and in many cases some lenders would approve a loan while others would decline it.
Given that lenders use different methods to calculate these criteria, especially serviceability, it’s best to engage a finance broker who specialises in investor loans to ensure you secure a suitable loan.
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