How Banks Assess Applications

The answer to the question ‘how do banks assess applications’ is the same as answering the question ‘how long is a piece of string?’

A line of credit is one of the most misunderstood home loan products in the market. On the one hand this type of facility can be of great assistance to a borrower looking to manage debt and pay off a home loan faster and on the other hand is a great tool for investors who are looking for interest only products to maximise their tax deductibility in respect of investment properties.

The answer really lies in the individual banks credit policy which can change quite regularly in response to economic circumstances and the bank's funding position. So, whilst it is impossible to come up with a definitive methodology which explains every bank's assessment process, it is still possible to outline the parameters under which a bank operates and to cover the points that are important in every loan application irrespective of policy or the economic climate.

Experts will tell you that good credit policy is the same as good common sense; most lenders will tell you they rely upon the five C’s to establish whether or not a loan should be approved.

So what are these five C’s?

Capacity. This simply means your ability to repay the debt. To establish capacity, a bank will look at a person's employment history and current salary and try to verify there is sufficient cash flow to support the loan repayments which will be required. This is why it a bank will seek current payslips and PAYG summaries from previous years to confirm that your income has been steady over a period of time. On occasions they will also ask for Tax Office Assessment Notices to verify even further. A self-employed borrower will find banks looking for an extensive list of information in this criterion and will look for at least the last two full financial year’s tax returns for companies and individuals alike. They will also require full financials for company for the last two years and possibly Tax Office Assessment Notices as well.

Cash. Possibly one of the least important factors, but important nevertheless is for a lender to establish that you have sufficient cash to finalise the deal. Banks will generally only approve loans up to a maximum of 95% of the value of the property being purchased, which means that you, as the borrower, have to come up with the other 5% plus any costs that may be involved by way of stamp duty, application fees, legal fees and other associated costs. Without evidence of funds to complete the purchase a lender is unlikely to proceed with your application.

Collateral. In a home loan purchase, this simply means that the house has to be suitable for the bank to accept as security. In almost every case the bank will send the valuer to examine the property and provide a report as to its suitability. The valuer will look at the property's location and general condition as well as an analysis of the real estate market as it applies to the locality in which the house is situated. If the report is favourable, the bank will deem the property to be acceptable and will proceed with your application. This is one of the first steps taken by a bank in assessing a home loan application.

Conditions. This process is where the bank takes into account the economic circumstances operating in the market and the overall conditions under which loans are offered. It's a chance for the bank to make a commercial decision based upon your individual circumstances and also for a bank to decide that alone can only be granted subject to certain undertakings from you. These extra undertakings could take the form of providing extra security, granting a loan over a short period of time or insisting upon a certain repayment schedule.

Character. This is where the bank makes an overall assessment of you as a borrower. They will look at your asset position, your current liabilities on your credit history to establish whether or not you fit the profile of a good risk. Assessors who look at home loan applications are expert lenders with a lot of experience and this is where their commonsense comes into play. For instance if you are a 50-year-old applicant with no credit history and a very low number of assets, warning bells will go off and further questions are likely to be asked. On the other hand if you are 30 years of age with an average level of assets and liabilities with a good credit history, steady employment, and money in the bank, you are likely to take all the boxes.

This broad overview paints a general picture of a banks approach to every loan application, but the details go far deeper as you will discover.

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