The most Important thing that banks need to verify before giving out a mortgage
Would the borrower have enough income to make the repayments for the home loan on a regular basis without financial hardship.
What will the bank use as a safeguard if a borrower is not able the pay off the loan. In most cases the property to be purchased would be the security.
Loan to Value Ratio (LVR) –
Expressed as a percentage of the value of the property being used as security for the loan. In most cases the higher the LVR the risk would also increase for the lender. If LVR is over 80%, Lenders Mortgage Insurance (LMI) would be applicable.
Lenders Mortgage Insurance (LMI) –
It is meant to protect the lender and not the borrower, as the debt load over 80% would increase the risk for the lender in a situation where the borrower defaults and not able to pay the loan back. LMI would help a lender cover the cost involved in foreclosure such as legal fees, insurance, real estate costs etc. From a borrower’s perspective, using LMI would allow someone to acquire a home loan having a smaller deposit.
Paying LMI gives reassurance to the lender of your intentions and willingness to repay the loan. In order to get LMI for a first home buyer a borrower should have no credit defaults, good employment record and genuine savings of at least 5% The interest rate offered by the Banks would depend on the type of security, for unsecured loans the rate would be a lot higher such as for personal loans and credit cards.