To get a mortgage from a bank or lender requires you to get a number of things right. Here are the key criteria banks look at when assessing your eligibility for a mortgage. We call it the 3 C’s which are Character, Capacity and Collateral.
Preparing to get a mortgage
If you are paying rent, and have been paying your rent on time with no problems, and have a good repayment history with your landlord, this does not mean the bank will lend you money. Although this will help persuade the bank to lend to you, it does not mean you meet their financial requirements.
The Character Test
Let’s start with Character, this is not actually a character test, but more of a look at your habits which provides an indicator to the bank of your lifestyle patterns and what decisions you make. To assess your habits they will look at the following;
- How stable is your employment
- How much debt do you have
- Are you meeting your current debt repayments on time
- Have you saved any money
- What is your credit report like
- How many credit enquiries have you had in recent times
- Are you married, single, and do you have dependent children
These are all just tools they use to take a snapshot of your current situation. Normally, you will not be approved or declined on one particular area (with the exception of poor credit history) but they add up to the total sum.
The Capacity Test
To get a mortgage, banks will also assess your capacity, which is your financial ability to repay the loan if they approved it. When you see mortgage interest rates, that is not normally the rate the banks use to assess you financially, they will also look to see whether you could still afford the loan if mortgage rates went up by 1.00% to 1.50% or even 2.00%.
For example, if your mortgage was approved and your repayments were $250 per week, they would look to see if you could still afford $300 per week as well. Because the last thing a bank wants to do is have a mortgagee sale, and throw a family out of their home because interest rates went up. No one wins in that situation, not the bank, and certainly not you.
To test your financial capacity, they will look at the following;
- How much are you earning from your usual hours of work
- How much are you earning from regular overtime
- How much regular commission are you earning
- How much are you receiving from Working for Families Assistance
- Do you have annual bonuses and if so, how much are they, and are they historic
- Are you receiving any rental or border income, and if so, how much
- Are you receiving any dividends
Basically they will look at all your sources of income.
Where things get a little grey is the overtime, bonuses and commissions. For example, if you were getting these forms of income but have only been getting them for 6 months, then the bank will most likely not use that income when it comes to assessing you financially for a mortgage.
However, if you have been receiving this income for 2 years or it is part of your employment contract the banks may use 50% to 100% of that income. This will depend on the bank and their mortgage lending criteria at the time. FYI, mortgage criteria does change often which is where getting a good mortgage broker comes in handy.
The Collateral Test
Here is where the bank will look at the home you are buying and decide whether it is suitable collateral. Or in other words would they be happy holding that home as security to give you a mortgage.
Here is what they will look at when considering the home you want to buy;
- How much are you buying the home for
- What is the value of the home
- What condition is it in
- What would be the use of the home (eg, a owner occupied or rental)
- Are there any adverse features of the property (eg, is it sitting over a known geothermal area)
- What is the title type? is it freehold, leasehold, maori land etc.
What do I need to do to prepare for a mortgage?
Here is my advice to most clients when they are committed to buying their own home.
- Don’t go out and buy a new car! The amount of people who have approached me to get a mortgage for them and do not qualify because they have just bought a new car is amazing!
- Don’t accumulate any more debt
- Save as much as you can even if it is a small amount
- If you are not in KiwiSaver, then join because you can use your KiwiSaver contributions as part of your deposit later
- Stay in your employment. If you do not like your current job, get a new job first and move to it
- Get rid of as much debt as you can now
You will be surprised how much you can improve your financial position and buy your own home, just by mastering a few financial habits. Here are some great tools to help you manage your finances and calculate your mortgage payments and also download my FREE HOME BUYERS GUIDE HERE
If you need mortgage advice or help, or would like to find out whether you would qualify to buy a home now, contact me and I will show you what you need to, so you can buy your own home.