This is the borrower’s (your) credit history . It’s mainly your reputation with the bank and other creditors, such as utilities, credit card, other loans or services in which you have established by your record of paying back your debts. Each borrower has credit reports maintained by the credit bureaus of a country. This report outlines all the information necessary to calculate a credit score. Think of it as a cover letter of sorts for your investment resume, after all, it is the very first thing a lender will look at in order to evaluate your investment loan request.
Capacity – Your capacity to repay the mortgage
The capacity is essentially the measure of a buyer’s ability to repay the loan they’re taking. It uses the client’s income, job, and job stability, comparing it against the total amount of debt to assess the borrower’s financial standing.
Most investors are under the impression that it’s the existing assets that bankers first take into account when assessing an investment loan, but it’s actually the net income that is evaluated first.
Capital – Your savings or equity
This refers to any monetary contribution the buyer has made towards their investment, for example, a possible deposit or your equity. While pawn shops HI a deposit may be the down-payment you’ve made towards acquiring your new property, the equity refers to the existing value of any other property which you may own.
The capital can often shifts the decision of the lender against you – especially in case you don’t have enough. The capital indicates your loyalty towards returning the bank’s money. The lesser the capital, the greater the chance of you defaulting on your loan, and the lesser your chances are for loan approval.
Collateral – Security
This is the assurance offered to the lender that you can pay off the loans in time. If you are unable to follow through, the lender can repossess the collateral to recover their investment. Think of it as a guarantee or security offered to the banks that you’ll be timely with your payment, just because you have something to lose.
Conditions – The Conditions of the Loan
The conditions lay out the details for the lender about how the borrower intends to utilize the loan and for how long. They don’t necessarily have anything to do with you as an applicant for a loan, but rather they’re more concerned with the factors directly influencing the loan itself that you have applied for.
The usual conditions are the amount of principal, interest rate, and the lender’s choice of financing a particular buyer’s investment loan.. This is mostly for assurance purposes to ensure that the money is being used towards the intended objective.
Video: How to Get Your Loan Approved, Fast
Watch the video below where our loan strategist Neil Carstairs explain what these 5 criteria are and how do lenders assess your loan based on these 5 criteria.
When considering an investment property for a standard rental agreement, appraisal from an agent would generally suffice. However, if the client is looking at different types of incomes from the property i.e. boarding, serviced apartments or AirBnB’s, then different policies will come into play. In such cases, some lenders may not even use or accept this as a form of investment income. As such, it affects a buyers borrowing capacity, directly influencing the amount they can borrow.
Moreover, different lenders use different percentages of the income – this means some lenders will use 80 percent, or even 75 percent only, thus changing the borrowing amounts yet again.