How Home Loan Applications Are Assessed

How Home Loan Applications Are Assessed

Understanding how home loans are assessed will give you an advantage in preparing yourself and your finances for a home loan. Here are the 3 C's of lending you need to consider: Capacity, Character, and Collateral.

Yes, your credit score and employment are vitally important, but there’s more to your loan application than just these factors. Your full financial profile will be examined in detail.

Each lender has its own approach, so be prepared for some uncomfortable questions as your finances are scrutinized.

Capacity (The 1st C)

Capacity relates to your ability to repay the loan. This involves a detailed examination of your income and expenses. You will need to show everything:

• Employment (Current & Historical): Demonstrating a stable employment history is crucial. Frequent job changes or casual employment may be seen as unstable.
• Other Income: Do you have additional income sources, such as a side business or income-producing assets?
• Expenses: Lenders will scrutinize all your expenses, including lifestyle-related ones (e.g., dining out, clothing, sports, subscriptions). It’s also a good idea to lower any credit card limits before submitting your loan application.

Character (The 2nd C)

This focuses on your credit and employment history, emphasizing stability and trustworthiness.

• Employment History: Regardless of how large your deposit is or how good your income appears, lenders closely examine your employment history for stability.
• Credit History: Lenders will look at your credit history to see if you’ve been timely with bill payments, cleared all debts, and been responsible with credit cards.

Honesty is key in this part of the assessment.

Collateral (The 3rd C)

Collateral refers to the security you can offer if you default on the loan. This involves reducing your loan to value ratio.

• Bank Valuation: Lenders will conduct a bank valuation (different from a market valuation) to ensure they can recoup losses if you default.
• Deposit Size: The larger your deposit, the lower your loan to value ratio, providing the lender with more collateral.

Welcome Home

At JKL, we’re here to support you in understanding the home loan application process and preparing your finances. Our experienced team will guide you through every step, ensuring you’re well-prepared to secure your dream home.

Experience our JKL real estate family. We’ll put the welcome mat out for you!