Understanding of the 4c’s of Credit!!
As I talk to home owners or home buyers throughout Australia on a daily basis, there continues to be a frustration that exists in regards to obtaining a loan.
“Why is it so hard to get a bank to lend to me?”
Others comment, “A bank will only lend me money when I don’t need it!”
or we hear, “decision depends on what kind of mood they’re in.”
If you have ever had similar thoughts, you are not alone.
There are many reasons that a bank will decide to either approve or decline a home loan application.
Now, whilst the whole finance market has changed radically over the years, the fundamentals of how a lender will assess an application hasn’t.
Understanding these fundamentals (and ensuring you have these areas in order) will help you prepare for a home loan.
I will go through them one-by-one this week.
Capacity to repay the loan
- Capacity to Repay the Loan
Without capacity to repay the loan nothing else matters.
This ‘C’, is all about proving to the lender that you can comfortably make the repayments based on your current income and expenses. You need to prove to the lender that you have, and will continue to have, the financial capacity to service the debt without hardship.
Bank’s credit assessor will:
Look at where your income is derived from job/business
What expenses you have, and then
Calculate what surplus there will be to service the loan you are applying for.
Each lender will have their own way of working this out which leads to different maximum borrowing capacities across different lenders.
You’ve got a high probability of getting your loan application approved if you’ve got a very good income to support the loan payments and a servicing ratio.
Next week I will cover Credit History