The Home Loan Approval Process

• Unconditional loan approval
• Serviceability
• Income
• Expenses
• The deposit
• Security
• Granting of approval
• Execution of mortgage documents

Unconditional loan approval

When the loan application is submitted to the lender, a fresh process of assessment begins. Prior to commencing this process, the lender may give “in principle” loan approval. It must be understood, however, that anything less that unconditional loan approval is NOT approval at all.

A borrower is not safe to commit to a purchase unless full and unconditional home loan approval has been granted.

Before granting unconditional loan approval, the lender must carefully assess the loan application in terms of the borrowers ability to service the loan, reliability of the borrower as a person who will observe the obligation to repay the loan, and the security for the loan.

Serviceability

Serviceability is the term used to describe a borrower’s capacity to “service” the loan; that is, to repay the loan over the agreed term.

To answer this question the lender must compare the borrower’s income and expenses, and satisfy itself that the loan repayments will not affect the borrower’s lifestyle. It is a requirement of the Uniform Consumer Credit Code (UCCC) that the lender be able to prove that it made sufficient enquiries to satisfy itself of the borrower’s ability to repay the loan.

In other words, a lender cannot allow borrowers to over-commit themselves. Most lenders will build in a “buffer” to ensure that rate increases can be accommodated by the borrower.

Although the lender has a responsibility to investigate the borrower’s capacity to service the loan, it is in the borrower’s best interests to provide complete and accurate information to assist the lender to fulfill this obligation.

Income

In order to prove their serviceability, borrowers must demonstrate that they have a regular income. This is a relatively simple process for borrowers who are in regular full-time employment, but can present special difficulties for those who are in receipt of an irregular income or are self employed. While some lenders may reject a loan application where there is no ready proof of income, others specialise in providing finance in such circumstances.

Numerous forms of income will be acceptable to the majority of lenders (e.g. rents, some pensions/welfare payments, and other forms of regular payment), and your personal lending manager can assist with information in this regard.

Expenses

As discussed above, the lender must compare the borrower’s income with commitments the borrower has in terms of living expenses, debts, and other commitments.

Interest

The first commitment to consider is one that the borrower does not yet have – the commitment to pay interest on the loan. The lender will determine how much the borrower must pay, with a built-in “buffer” to allow for variations in interest.
Living expenses

It is important to be as accurate as possible when estimating your living expenses. This is because over-estimating can result in a decrease in your “serviceability” and therefore a decrease in the amount your can borrow. At the same time, under-estimating can cause problems with your actual ability to service the loan.

Lenders usually rely on a formula to determine a borrower’s likely expenses. The Henderson Poverty Line is a basis that is often used to estimate living expenses in the absence of other information. Of course, you should tell your personal lending manager if the amount allowed by a particular lender is less than your actual expenses, so that your loan application is accurate.

Don’t forget the car. While many people regard their car as an asset, it is really an ongoing liability (although a salary package that includes a motor vehicle will probably not be regarded as a liability).
Existing Debts

If you have credit cards, your lender will assume an amount as a monthly expense. High credit card limits may affect the amount you can borrow, but your personal lending manager will provide you with further information regarding credit cards and existing debts.

Your lender will conduct credit checks with Baycorp (formerly the Credit Reference Association of Australia or CRAA) to confirm your credit history. Any credit matters that were left off your loan application will be discovered through this check, and you may have to provide an explanation for them.

In addition, your lender will require you to sign a declaration as to any outstanding debts. Making a false declaration can create a set of separate problems!

The deposit

While most sales contracts require the purchaser to pay a deposit of 10%, lenders require borrowers to have at least 20% of the purchase price. This is to cover the actual deposit, and also the legal costs, stamp duty and registration fees associated with the purchase.

A borrower does well by having as large a deposit as possible. A large deposit represents more equity in the property, and therefore less in terms of borrowed funds and interest.

Where a loan exceeds 80% of the property value the lender will require mortgage insurance, paid for by the borrower. Having savings in excess of 20% of the amount to be borrowed eliminates the requirement for mortgage insurance, and can represent a saving of well over $1,000.

Security

In order to determine the extent to which the property will secure the loan, the lender will require a formal valuation. Most lenders have a panel of approved valuers, and will have the valuation performed by a valuer of their choosing.

Because it is the lender who is engaging the valuer, the valuer owes a professional duty to the lender, and not the borrower. Most lenders will refuse to provide a copy of the valuation to the borrower. In fact, the borrower is unlikely to know the result of the valuation unless the property is found to be of insufficient value to fully secure the loan.

While the purchase price will, in most cases, help to establish the market value of the property, there are many cases where purchasers have paid too much for a property, and have had finance subsequently refused. (This is a very good reason for any purchaser to ensure that they have obtained independent legal advice from a qualified lawyer prior to signing a contract to purchase. It is also a good reason for the purchaser to ensure that the estate agent is not the person who drafts the finance condition.)

For further information about valuations, independent legal advice, and the problems with estate agents, visit the website of our partner firm Real Estate Lawyers Victoria.

Granting of approval

When all of the lender’s conditions have been met, and the property valuation has confirmed the property as being of sufficient value to secure the loan, the lender will provide written confirmation of unconditional home loan approval.

Unless the borrower has received written notification of unconditional loan approval, any purchase contract should contain a special condition stating that the Contract of Sale is conditional upon the granting of unconditional home loan approval.

Usually, the personal lending manager will be informed that the loan has been approved, and the lending manager, in turn, will notify the borrower’s solicitor.

The lender will then arrange for the preparation of the letter of offer, and the mortgage documents.

Execution of mortgage documents

When the letter of offer and the mortgage documents have been prepared, they will be sent to the borrower’s solicitor so that the borrower can execute them.

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