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
Collateral (Loan security)
Collateral is all about the security you can offer the lender.
The credit analyst will look at the proposed security for the loan and determine first of all whether they are happy to lend against it, and secondly what percentage of the value of the property they are willing to use.
A home in the suburbs will be attractive to all lenders, and sometimes you will be able to borrow up to 95% of the value of this property – this is known as the Loan to Value Ratio (LVR). By contrast “unusual security” will have a potentially lower maximum LVR. Some security properties that may be affected are: acreage properties, very small apartments, inner city apartments in certain areas or commercial or mixed zoned properties. Again, this is where we will see large differences between lenders on what they are comfortable to lend against.