Buying a home should be one of the most exciting and encouraging times in your life. You’ll be starting a life somewhere new, with more space, better facilities, and maybe even a more convenient commute. If it’s your first home, then you’ll be gaining a huge amount of freedom and responsibility, which can be intoxicating and frightening! But to make this happen you need to get a home loan first. Fortunately, understanding the criteria that a lender looks for can help you to get the best deal and the best new property!
When a lender provides anyone with a loan, they are essentially making an investment. This works just the same as investing in stocks and shares: the lender expects the individual to pay the loan back with interest, thus meaning they’ll earn money on that investment. But at the same time, the lender also takes on a certain amount of risk: as there is always the possibility the individual won’t be able to pay off the loan they’ve taken out. That in turn means that the lender might lose money, and so they need to do everything they can to ensure that whoever they give the home loan to is going to be capable of paying it off.
This is why lenders have strict criteria for giving out mortgages. (That, and because the lack of regulation in the home loans market is partly what led to the 2008 financial crisis!1)
So, precisely how does a lender make sure a borrower is likely to be able to pay off their debt? Here are some of the things they will look at:
Criteria for Home Loans
Income vs Expenses
The primary thing that lenders will look at when considering someone for a home loan, is whether that person’s income outstrips their outgoings.
In other words: are you earning more than you are spending? To determine this, the lender will ask to see your payslips, and they will also ask to see your bank accounts in order to determine how much you typically spend. Recurring expenses such as bills will come under particular scrutiny.
Usually, a lender will ask to look at statements going back at least three months. For that reason, it’s a good idea to get your finances in order prior to this date. For instance, you may decide to cancel any subscription fees that you are currently committed to! Likewise, this would be a good time to stop buying widescreen TVs and expensive clothes!
Of course, the previous entry on this list somewhat requires that a person be employed and earning money. It also goes a little further than this though. For instance: a bank will likely want to see that your job is stable. That means you’ll have more luck achieving a home loan should you apply once your probation period has ended.
Should you be self-employed, this becomes more difficult. Now the bank is going to want to see your proof of income in the form of tax returns. Most often, they will ask to see at least three years of returns. They will also likely want to see that your income is increasing rather than staying the same or growing smaller: so make sure that you keep working at your business, and avoid getting too cheeky with those expenses!
Of course, it also makes a big difference if there are two of you both in employment.
A lender is also going to be interested to see just how much money you have managed to save, which you will likely put toward your deposit (while keeping some back as a rainy-day fund).
If you don’t have any money saved up, then this is a good opportunity to prepare for the scrutiny of a lender.
Keep in mind that lenders are also legally required to check the trail of any large amounts of money you have received. If you get the money from a relative, then they will need to show how they acquired it too. This is to prevent laundering.
A lender will also look at the circumstances surrounding a person’s lifestyle. For instance: they will want to know if you plan on having a child – even though this can seem a little invasive!
Debt and Track Record
Finally, home loan lenders will want to see your outstanding debt and your credit score. This helps them determine whether you have other outstanding financial commitments, and it also helps them to identify if you will be likely to successfully pay off future debts.
A credit score is formed based on your history of financial interactions: things such as your ability to pay off previous debts, or the number of old checks that have bounced.
How to Get a Home Loan With Bad Credit
Firstly, you need to amass as much money as you can to put towards your deposit. The smaller you manage to make your deposit, then the more likely you are to secure a loan (as the total you are asking for will be smaller). Likewise, think about repayment structures and paying back smaller amounts over a longer period. This earns the bank more money, and also means you need less disposable income each month. Of course, it’s also more expensive in the long term!
If you have damaged your credit due to previous times of difficulty then, but are now in a position to amass some wealth, then you might be advised to wait a year to earn a deposit before you try moving. During this time, you can also attempt to repair your credit rating and there are several ways you can do this. One of the best known is to get a credit card, but to always make your payments on time. In this way you wouldn’t really be using your credit card as such, but just keeping one going to demonstrate to the systems that you are capable of making payments on time. For example, take out a credit card and use it only to top up your petrol, then just make sure that at the end of every month you pay off the credit on time and efficiently.
If you need to move out immediately however then you will need more immediate measures. One option is to amass funds and repair your credit while renting, or staying at your parents or a friends’. Another is to pool your resources with someone else, and to take out a loan together on a new home which will cost you each half as much. Finally, you could rent cheaply in the interim.
All of these options are things that a bad credit home loan broker would likely recommend to you. Brokers are go-betweens who can negotiate the terms of a loan for you, and can help you to get one when you might not otherwise have been able.
If you are trying to secure a home loan and struggling, you should always use a bad credit home loan broker to improve your chances. Brokers know the market extremely well, and they’ll be able to advise the best lender for you, based on your current circumstances.