As a mortgage broker, it’s essential to understand the factors that affect a borrower’s capacity to take out a loan. These factors play a crucial role in determining whether a borrower will be approved for a loan and, if so, at what terms. In this blog post, we’ll take a closer look at the various factors that affect borrowing capacity and discuss ways in which borrowers can improve them.
Income is one of the most critical factors when it comes to determining a borrower’s capacity to take out a loan. Lenders want to see that a borrower has a stable and consistent income that is sufficient to cover the cost of the loan. This includes not just the monthly mortgage payments but also any other debts and living expenses. Borrowers can improve their income by taking on additional work, starting a side business, or by asking for a raise. It’s important to note that lenders will take into consideration the type of income, whether it is a salary or commission, and how long the income has been stable (these qualification periods can be up to 6-12 months).
Credit score is another crucial factor that affects a borrower’s capacity to take out a loan. A credit score is a measure of a borrower’s creditworthiness and is used by lenders to determine the risk of lending money. A good credit score can help borrowers qualify for better interest rates and loan terms. To improve their credit score, borrowers can pay off outstanding debts, avoid opening new credit accounts, and make sure to pay their bills on time. It’s important to also check your credit report for any errors and have them corrected.
Employment history is also important when it comes to determining a borrower’s capacity to take out a loan. Lenders want to see that a borrower has a stable and consistent work history, and that they have been employed for a certain period of time. Borrowers can improve their employment history by staying at their current job for a longer period of time, or by taking on additional work. Self-employed borrowers may have to provide additional documentation such as tax returns to prove their income stability.
Debt-to-income ratio (DTI) is another key factor in determining a borrower’s capacity to take out a loan. This ratio compares a borrower’s total debt to their total income, and lenders use this information to determine how much of a loan a borrower can afford. A lower DTI means that a borrower has more disposable income and is less likely to default on the loan. Borrowers can improve their DTI by paying off outstanding debts or by increasing their income.
The property value is also a key factor in determining a borrower’s capacity to take out a loan. Lenders want to see that the property being used as collateral is worth the amount of the loan being taken out. The higher the property value, the higher the borrowing capacity. To improve the property value, the borrower can renovate or maintain the property. It’s also important to note that lenders will take into consideration the location and type of the property, as well as any potential risks such as flood or bushfire.
The type of loan is also important. Some loans have specific requirements when it comes to the type of property that can be used as collateral. For example, some lenders may not approve loans for properties that are considered non-conventional, such as mobile homes or vacation homes. Borrowers can improve their borrowing capacity by purchasing a property that meets the lender’s requirements.
The deposit is also a crucial factor in determining the borrowing capacity. A higher deposit will result in a lower loan-to-value ratio (LVR), which means that the borrower will be able to borrow more. Borrowers can improve their deposit by saving more money or by using equity from another property. It’s also important to note. Don’t wait, reach out today and get expert advice on boosting your borrowing capacity!
