How Mortgage Loan Lenders Assess Your Application: Serviceability, Credit Scores & LVR

Applying for a mortgage is a big step and you want to make sure nothing goes wrong with your application. One way of doing this is by understanding the detailed process by which mortgage lenders evaluate your application. They're essentially assessing the level of risk you present as a borrower. This evaluation typically involves three key criteria: serviceability, credit scores, and LVR. If you understand these factors, you can prepare a stronger application and increase your chances of approval.

1. Serviceability: Can You Afford the Loan?

You may have heard the term ‘serviceability’ when applying for a loan. Serviceability is a mortgage loan lender's primary concern. It's how they determine whether your income is stable enough to comfortably cover your mortgage repayments, along with your other living expenses and financial commitments. Lenders calculate this by looking at your Debt-to-Income (DTI) ratio. They take your total gross income and subtract all your monthly debts and expenses. These expenses include things like credit card payments, car loans, and student debt.

Mortgage loan lenders will also assess your ability to make repayments at a rate that is higher than the current interest rate, often with a buffer of 2-3%. This is to ensure you can still manage your repayments if interest rates rise in the future. While this may seem like a strict process, try not to think of it as a barrier to finance, but rather a tool to prevent bad debts in the future. A strong serviceability assessment demonstrates to the lender that you are a reliable and low-risk borrower.

2. Credit Scores: Your Financial Report Card

We’ve all heard about credit scores and how we need to avoid bad ones, but what do credit scores really mean? Your credit score is a three-digit number that acts as a summary of your financial history. It reflects your past behaviour with credit, including your payment history, the amount of debt you have, the length of your credit history and any new credit applications. If you miss bill payments, this could lead to a lower credit score. Lenders use this score to quickly gauge your creditworthiness and your likelihood of defaulting on a loan.

Generally, a higher credit score indicates a lower risk. While the exact minimum score can vary between lenders and loan types, a good score will significantly improve your chances of approval and may even qualify you for a lower interest rate. A low score, or a poor credit history with late payments or defaults, can be a major red flag and may lead to a loan denial.

3. Loan-to-Value Ratio: The Collateral Assessment

The Loan-to-Value Ratio, or LVR, is a crucial metric that measures the amount of your loan against the value of the property you're buying. For example, if you're buying a $500,000 home and need to borrow $400,000, your LVR is 80%. The remaining $100,000 is your deposit. Most mortgage loan lenders will be happy with an 80% ratio.

If you have a lower LVR it means the deposit will be higher and the lender is lending a smaller percentage of the property's value. This is considered as less risky..

To avoid getting lost in the financial jargon or being caught out by high debt repayments, it’s best to work with a mortgage broker who will ensure that your investment and your interests are protected.

Speak to a consultant at Mortgage Providers for a stress-free home loan application with mortgage lenders in Australia. We will ensure your assessment is done in the most transparent and efficient way to unlock the financial solutions you need.