The current lending environment is certainly challenging due to Covid-19. many broker and customer has experienced longer loan processing time due as lender struggling with staffing number due to various isolation and lock down in certain region.
it's no longer strange to hear that loan application with strong position has been rejected, as borrower are further scrutinised with their job prospect and monthly expenses.
But what really change with the and lending criteria? Every lender has risk appetite and lending policy which determine if the loan application is approved or denied. As a broker we are seeing risk adjustment across our lender panel, and potential borrower are further scrutinize to meet their loan obligation. Lets start with the basic, In general though any borrowers are assessed against the 5C
Character, The client need to show good character.
Capacity to meet repayment .
Collateral or security for the loan.
Capital requirement to cover the property purchase.
Condition of the market.
your property location is important as it determine the potential growth in value and the amount you can borrow against, some post code are deemed desirable that lender will lend up to 95% of the property value, while other post code with high criminal level, low infrastructure growth and certain rural area may only attract 70% of the property value.
As most mortgage are secured against the property, the valuation of said property is critical
(Collateral for the loan). Its important to remember there are two type of valuation: 1. Market valuation, which are normally provided by independent valuer to ascertain what the market willing to pay if the property are sold. 2. Bank valuation, which determine the property value at expense level, that is if you can no longer afford to meet your loan obligation and the bank then decided to sell the property as quickly as they can to cover their loss and break even.
Your lender will provide the loan against on the bank valuation result.
So where do we start? Lets take a look at the case study below.
Say a prospective borrower offer to purchase a house for $1.5M
If the market valuation is $1M
And the bank valuation is $800K
Most lender will provide loan at a maximum 95% of the bank valuation: (95% x $800K ) = $760K The borrower then must show evidence that they have sufficient fund to cover balance of the purchase in their bank account. $1.5M - $760K = $740K (Capital evidence)
Borrower must also show the financial capacity to meet the loan repayment on time and good credit history (Good Character)
The borrower are then questioned whether they are expecting any changes to their current employment arrangement (sadly this is something which is unpredictable due to Covid 19). When you speak to a real estate agent, they will commonly ask the following questions: Have you got pre-approval?
What’s your credit history like?
What do you do for work? ( hospitality and tourism are one of the areas which lender consider high risk area in the current Covid-19 environment)
Are you working with a broker or direct application with the lender?
From there the loan application will typically start at documents gathering and fact finding (Capacity to meet repayment).
Confirming your monthly living expenses and any debt
How much saving you have after paying all expense
can those saving cover the mortgage repayment
when its ready, your broker or the banker will proceed with submitting the application.
Upon receiving the application the lender credit analyst will often compare your earnings against the economy ( Market Condition ) and take a worst case scenario position.
As an example, based on the current Covid-19 environment which out of these two applicant has better job stability:
A flight attendant with high income $100K with 2 years work experience and recently grounded.
A cleaner earning $60K annually with steady employment.
Given those consideration the credit analyst will then make the final decision to approve or reject the loan.
Loan application life cycle start from Fact finding stage (10%) > pre-approval ( 30%) > conditional approval (70%) > unconditional approval (90%) > settlement (100%)
The last thing you need to be aware of is the cost of obtaining the loan!
your broker and lender will produce a Product Disclosure Statement, Credit guide and Fee listing, take your time to do your research on the following fee and understand the cost.
Application fee
Settlement fee
Monthly fee
Dishonor fee
Solicitor fee
Building and pest inspection fee
Mortgage registration fee
Stamp duty
Happy hunting!
For no obligation chat and enquiry get in touch with one of our representative.