Home loan eligibility? 5 questions I always ask borrowers

What do I know about home loan eligibility?

I started mortgage broking in 2008, armed with knowledge and enthusiasm to help everyone—or so I thought.

I cut my teeth driving to meetings all over town, often late at night. I met good people, rewarding in every sense. There were also many uncomfortable, and often hopeless meeting situations.

The truth was plain to see – I could not help everyone.

I learned you could get very busy saying yes to meetings.

I soon released busy does not always equal productive.

I learned not everyone is eligible for a home loan. The truth was plain to see – I could not help everyone.

Do I regret it? Not for a minute.

I found dealing with numbers the easy part, working out people and their unique scenarios, was the hardest part of mortgage broking.

Not interested in offering false hope to potential borrowers, I focussed on identifying good borrowers with some initial questions that I will share with you.

These five questions are what I ask over the phone to give be a firm indication of whether a home loan application is likely to end in tears or celebration.

Who determines home loan eligibility?

The lender assessing your home loan application to will ultimately determine your home loan eligibility in Australia.

You have two choices when you want to explore home loan eligibility.

• Pass or Fail.
  Put an application up to a lender and see what they say. You may or may not get feedback if the application is declined.

or

• Start a process.
  Engage a good lender or mortgage broker willing to do the required work and offer advice before any application is made. They can help you get your proverbial house in order.

Having been in the privileged and trusted position of mortgage broker since 2008, I have seen many people who seem initially ineligible, become eligible for a home loan.

There are many reasons a likely decline can become more of a sure thing. Sometimes it is waiting for a job to start, finding a guarantor, or waiting for a visa to come through.

I sent myself around the twist early on in my career thinking I had to make the impossible happen for would-be borrowers—which is impossible.

I discovered that people are often willing to put all the home loan eligibility pieces into place prior to making that big home loan commitment.

So, while a lender will make the ultimate assessment of your home loan eligibility, it should not be guesswork. I advise against putting in a home application just to see….

Seek feedback on your home loan eligibility.

Get prepared.

Stay ready.

What my questions tell me about home loan eligibility

I ask like to ask some initial questions of people who want a home loan for two main reasons.

Fact finding
Fact finding is the discovery stage of the home loan approvals process. A fact find should cover borrower needs and objectives, as well providing the necessary information to calculate home loan affordability.

Initial fact finding questions can offer an early indication of where you are at. Ready or not, you can be one step closer to home loan eligibility in Australia. A mortgage broker or lender can guide you from this point and either:

• Define some achievable home loans scenarios, supported by your current financial position, and still aligned with your goals.

or

• Work on improving your current financial position to improve your home loan eligibility.

Financial awareness
Do you know what you spend each month. For real?

Do you know what you get paid – gross and net?

Remember how shark tank contestants can be made to look silly if they cannot answer questions on key financial elements of their business idea?

It can be a similar situation when exploring home loan eligibility. Key questions will be asked of your financial position. If you can answer these, I consider it a positive signal for proving home loan eligibility.

That said – there are plenty of people who don’t know and do just fine. For me, I see good financial behaviours and habits in people who know the ins and outs of their own financial position.

Five questions for clues on home loan eligibility

There are some key questions I learned to ask over the years that gives me both a clearer picture of financial position, and home loan eligibility.

No one is interested in this ending badly.

Wanting a home loan and being eligible for a home loan are very different things. Filtering out some of the noise and emotions that are part of the home buying journey, is made easier by asking these crucial questions.

Intro – Tell me about you

Mortgage broking is about relationships, helping people. Home loans are just part of the home buying process.

I find a get to know you discussion can reveal some who the client is, what makes them tick and what they are trying to achieve.

It can also reveal some potential showstoppers like visa or residency status in Australia.

Much of the home loan discussion will be steered by an understanding of the client – rather than getting into any financial detail too early.

Q1 – Can you tell me about your job?

Cashflow. Money in, money out.

Understanding the surplus cash position is common to all home loan applications. Home loan repayments need to be paid.

Money in, for the most part, is from a job. You could be a self employed business owner or work for a company.

These are some of the work-income related conversations which can go a long way towards understanding home loan eligibility in Australia:

Are you self-employed or employed?
There is no wrong answer here. Just looking to explore things further by starting here.

Type of employment
Permanent or not?

How much do you earn?
Can you tell me what they earn? Is it consistent or does it fluctuate?

How long have you been doing this?
Being with the same employer is not always the intent of this question, more consistency of the role you perform.

What does employment reveal?

A key to my home loan eligibility screening is determining if income be relied on for home loan repayments.

Questions around employment can reveal inconsistencies between client understanding and lender definition of employment. This can affect how income may or may not be used to justify servicing the proposed home loan repayments.

Maybe someone had a great year income-wise? Can it be relied upon for a home loan repayment?

On paper – say you ‘could’ get a loan. If you are doubtful next year’s income will be as good as the last, should you base your home loan proposal on uncertain income?

No one is interested in this ending badly.

Employment questions go to the heart of understanding income to rely upon for home loan repayments.

Q2 – Do you have any savings?

My article exploring how much deposit you need to buy a house makes it clear deposit is not everything. Home loan eligibility is much more than savings.

So why bother asking about savings?

What do savings reveal?

Firstly, can you answer this question quickly? How much attention do you give your savings accounts?

Savings are an indicator of financial management skills:

• Do you spend less than you earn?
• Do you have an emergency fund?
• Are your savings regular?

While large deposits are not always necessary, bigger savings amounts can open up more lenders, and home loans, to choose from.

Q3 – What loans or leases do you have?

Home loan eligibility can be impacted in several ways when you have non-home loan debts.

Credit scoring and lender internal scoring systems are generally tolerant of some forms of lending. For example, many people have a credit cards.

Here some forms of non-home loan lending I generally see.

• Car loans
• Personal loans
• Novated leases
• BNPL
• Store cards
• Credit card – Do they pay if their credit card every month
• HECS/HELP debt
• ATO repayment plans

What do loans and leases reveal?

Each loan can eat away at the surplus income available for home loan repayments. Some forms of lending, like pay day loans, indicate income and expenses are not well balanced.

The more non-home loan debts you have, especially if they have been applied for in the last six months, the less hopeful I would be about your home loan eligibility.

Combine any of these loan arrangements this with little or no savings, and an imperfect repayment record, home loan eligibility becomes less certain.

Notably, I am referring to current home loan eligibility. There have been many borrowers over the years that have worked through a plan with a mortgage broker to get on top of their debts and position themselves ready for a home loan approval.

Q4 – Have you got a good credit record?

Do you know your credit score?

Is there anything you need to highlight on your credit file?

You credit file and credit score is not the same thing. My article on credit scoring for Australian home loans details the difference between these and explores the minimum credit score for a home loan in Australia.

What is helpful to understand at this stage is if there is anything noteworthy on your credit file. Are obligations up to date? Are any credit-related skeletons in the closet?

Common flags on reports I have seen are:

• Telco bill default from a previous share house arrangement. They got let down by other people and a default was registered under their name.
• People unaware they have credit products until it is flagged on a credit report. These are typically store cards with interest free repayment arrangements.

What does a credit discussion reveal?

From my experience, if a person does not know anything about their credit file, perhaps not even aware they have one, there is probably nothing to see.

In my mortgage broking experience, it is very rare to have something adverse appear on a credit file and the client know nothing about it.

Clients who know a lot about their credit file may have had situations giving rise to paying close attention to their credit score. This is good to know, early, to understand if home loan eligibility is realistic or not.

Q5 – What are your living expenses?

Living expenses. This is one area of discussion, no matter how much or little you earn, that reveal much about money management—and home loan eligibility.

Living expenses include everything you need to live, usually calculated monthly. And don’t forget your commitments—like children.

Sometimes, borrowers can be unaware of their spending, yet still be great savers, so likely be eligible for a home loan.

However, I have also seen people make enquiries for a home loan, who spend more than they earn. Rather than admit it, they usually wait for me to tell them! Not a great indicator of home loan eligibility.

Again – there could be ways to work towards a home loan approval. But first things first, before taking on a big home loan, living expenses is one elephant in the room that needs attention.

What do living expenses reveal?

Having analysed living expenses with clients over the years I have a good idea of what costs to live in a city in Australia. So, I can tell when a client has an accurate idea of their spending levels. If clients know their living expenses with accuracy they are more likely to be eligible for a home loan.

In my experience, there are too few that know their living expenses. Mostly, I hear what they would like to be spending – two very different things.

Once you know your living expenses, you know how much spare cash you have each month for home loan repayments. Something I encourage you to take control of, rather than wait for an answer.

Empowerment is key to taking control of a home loan. After all a home loan is usually something you want to pay off as soon as you can.

Final word on home loan eligibility

Money and numbers. The same numbers should get the same answer. But wait….there are the people behind these numbers.

We all have needs, wants, goals, aspirations.

My five initial questions can help gain an initial understanding of home loan eligibility.

Initial feedback can provide some direction—but do not stop there. Time to get to work. It could be rebuilding your credit file, starting a savings plan, or working through options for your first home loan.

Once an indication of home loan eligibility has been established it is time to move towards your goals and objectives. Whether it is a pre approval or home loan for a purchase, my article on the home loan approvals process details the steps between now and home loan approval.