3 Essential Factors That Influence Your Borrowing Power
Buying a home can be a complicated process. There are many details to finalise before the house becomes yours, including obtaining a mortgage.
When you apply for a home loan, lenders examine a variety of financial data to determine the risk of approving the loan. The higher the risk, the more likely the lender is to deny the loan or offer a higher interest rate.
Before searching for loan products, you may want to review your financial information to help determine your borrowing power. Pay close attention to the following factors to increase your chances of obtaining a loan for your dream home. The government has a detailed resource with do’s and don’t for borrowing.
1. Your Credit History
One of the first factors that lenders look at is your credit history. Your credit standing provides lenders with a detailed look at your past ability to pay off loans and credit cards. When you fail to complete payments on time, or if you have an account that goes to collection, you may have bad credit. If you have bad credit, this can be mended. Credit reports are available through recognised organisations.
While lousy credit may limit your ability to obtain a mortgage, there are still options available. Supplying a larger deposit, signing a loan with a guarantor, or using equity from another property may limit the associated risk with approving your loan.
2. Income and Total Debt
Lenders also want to examine your income and your total debt. In most situations, you will need to provide documents to establish two years of stable income. Establishing proof of income shows lenders that you have the funds available to pay your monthly repayments. However, your income is offset by your debt.
Even if you have a sizable income, your debt may limit your borrowing options. A high debt to income ratio shows that you have already accumulated a lot of debt, which increases your risk for following a scheduled monthly repayment plan.
If you are worried about your debt to income ratio, you may want to start paying down some of your debts before applying for a loan. However, there are ways to offset the debt. As with bad credit, you may consider saving a more substantial deposit or signing with a guarantor.
3. Available Money for a Deposit
Along with your credit, income, and debt, lenders want to know how much money you have available for a deposit. Typically, you will need to supply at least 20% of the property’s value to obtain a loan.
If you do not have enough for this deposit, there are two other options. Without the required deposit, you can sign with a guarantor that uses the equity in his or her property help secure your loan. Another option is to pay Lenders Mortgage Insurance. This insurance is an additional fee that protects the lender in case you default on your loan, and it gets included in your monthly repayments. The RBA has detailed information on LMI should that be a good choice for you.
Use an Online Calculator to Estimate Your Borrowing Power
If you are ready to begin comparing interest rates and loan options, you can use an online borrowing power calculator to help you determine how much you can afford. After you supply a few pieces of information, it can help determine the amount that you are likely to get approved for if you apply for a home loan.