Once a upon a time, in a land not so far away... a band of merry men rained money down on their loyal subjects and friends to buy as much as they could in land and property.

They asked no questions, just the assurance that their subjects and friends would one day pay it back. The community flourished and everyone was happy for a short time.

The merry men kept a terrible secret, however. The money they so generously gave away was not entirely their own.

They didn’t think of the consequences of this mass spending and mass debt until, one day, the evil debt collectors demanded their money back. The merry men were stunned and could not pay back the money.  The debt collectors attacked the land and, almost overnight, the merry men were left broke and their loyal subjects homeless and desolate.

The end.

Okay... so not a bedtime story for the children but that was a very simple retelling of the start of the global financial crisis - something that we all still feeling the repercussions of. 

While Australia was lucky and not impacted hugely, it did lead to big changes to our financial industry and how banks now do their lending. What was once as easy as being simply employed in the workforce is now not so much the case. So what makes an ideal borrower now?

Employment

This one is kind of a given. To borrow, you need to be earning. Saying that though, not all employment is created equally. 

A bank’s favourite is by far the full time employee who has completed their probationary period. They will lap that up across all lenders.

If that’s not you though, don’t think the home loan dream is dead. Lenders will also consider casual, contract, part-time and self-employed borrowers as well, but you will need to have been in the role longer. You will require proof of consistent income going into a bank account, which unfortunately means cashie job proceeds stored in the “mattress bank” will simply not cut it.

Credit Rating

This is, for many lenders, the first determinant of whether they will consider your application. The second that your details are in the system, they will check your credit rating. They want to see a high credit score - this is proof to the bank that you are reliable and capable of paying your existing debts. 

Some lenders will issue an automatic decline on clients who fall under their required credit rating and, just a heads up for you young first home owners out there, some lenders will even look poorly towards a potential borrower if they have no credit score when enquiring for their first home loan.

Crazy yes, but they’re banks... they can do what they want.

Savings

The banks also love a borrower that can save and can build a decent deposit. If you can manage to get a 20% deposit for your home loan, the banks will practically marry you on the spot.

Don’t be discouraged if that seems a little unachievable, as many lenders are also happy with a 5% deposit. Like income though, ensure that it is in a bank account and not under the mattress. The “mattress bank” may not charge fees but they also unfortunately don’t provide statements!

Servicing

Finally, the biggest factor in what makes you an ideal borrower is “servicing”. So you have a job, savings and your credit score is great but the banks will still ask “Can you afford it?”.

This is where servicing comes in. 

Servicing is where your friendly broker (see why brokers are the way to go) crunches all your financial information into the bank’s fancy calculators. This includes

• monthly income,
• monthly repayments on any existing debts, and
• monthly expenses (i.e. estimate of every... single... dollar that you spend).

The same fancy calculator will then tell us exactly what you can afford and if you can service to purchase your property. You service? You’re a winner!

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So Mr or Mrs Employed with the high credit rating, abundant savings and servicing perfection: you are the ideal borrower! For those who may not necessarily fit all those categories however, don’t give up hope. There may still be lenders for you.

Next week, I will tell you all about them as we enter the world of non-conforming lenders.