How banks assess your property investment loan application [Property Update, 2015]

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Essential reading for both investors and would-be home owners who are shopping around for loans.

Republished in ‘Living in Tarneit’ with permission from property investment adviser Michael Yardley. Follow him on Twitter here.

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How banks assess your property investment loan application
by Michael Yardley
Source – Property Update, published March 26, 2015

Would you lend money to yourself?

With our property markets gearing up for another good year more investors are looking at their borrowing capacity to see how much the banks will lend them.

So what exactly do the banks look for when assessing your loan application?

NAVIGATING THE 4 C’S

In the good old days money was readily available and the banks looked for reasons to approve as many loans as possible.piggy bank house

Now they’re still keen to lend money, but they’re much more careful who they lend it to.

As a result, they have dusted off the long-standing rule books on loan assessments and are once again referring to what is known as the “Four C’s” of lending.

These are:

Character
Collateral
Capacity
Capital

>>> CHARACTER

When banks refer to an applicant’s character, they are essentially looking at that person’s credit history.

In other words;

• How stable is their employment?
• How stable are their living arrangements?debt
• What type of loans have they sought and been approved for in the past?
• How long did it take them to repay their debts?
• Did they default (miss payments) on any loans?
• Are there any judgments against them with regard to bad debts?
• Were they always on time with their repayments or did they drag their feet?
• How many credit inquiries have they made and over what timeframe?

All of these factors that go toward determining an applicant’s character are assessed using the individual’s credit file.

Everyone who has ever applied for any type of finance, be it a credit card, mobile phone account, personal loan or home loan has a credit file registered against their name

Whenever you apply for credit, the credit assessor will obtain your credit file and from this document, work out whether you have a good or bad credit rating or history – this tells them all about your lending “character”.

Lenders want to know that you have the capacity to pay them back – with some form of stable employment and income, and how well you honour your loan commitments – do you pay your debts on time and in full?

Basically they want to make sure that they will get their money back.

Your credit file is run by a company called Veda Advantage.

The good news is you can go to their website – http://www.mycreditfile.com.au to request a copy of your credit file, which outlines things like;

• Any loans you have applied for in the past 10 to 15 years
• References to bad credit you may have had in the past seven years
• Bankruptcies or judgments
• Current and historic directorships in companies
• Past residential addresses
• Historical employment data

In other words, it makes you pretty much transparent to the bank, with your credit file telling a fairly detailed story about your behavior in the credit world.

All lenders and mortgage insurance companies have access to this file and when applying for a loan, you give them authority to delve into your credit history. This is one of the very first steps in the assessment process.

This is an excerpt from Property Update. Please click here to read the entire article at its source.

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