Obtaining finance for a home purchase can be a complicated process, and there are certain criteria that we require borrowers to meet before we will agree to finance your home. This article provides some information on how applications for credit are assessed, giving you a greater understanding of how you can get into a position to have your next application approved.
Here are 5 things you need to know before obtaining your home finance.
One of the factors used to assess an application is the judgement on the ability of the applicant(s) to make the finance repayments without experiencing financial hardship. We will consider a range of factors including income, expenses and other liabilities in order to determine whether the applicant will be able to comfortably make the finance repayments, even in the event of a rent rate increases.
2. Loan-to-Value Ratio (LVR)
Another factor considered is the Loan to Value Ratio (LVR). This is the amount you are planning to borrow as a percentage of the value of the property. Any savings the borrower has can be used to reduce the amount being borrowed which will, in turn, reduce the LVR. The LVR is important because if the borrower is unable to repay the finance and we are required to repossess the security property, we will want to ensure that the value of the property provides sufficient equity to repay outstanding debt(s) and ijarah.
In many cases, we will lend up to 75% of the value of the property. If the LVR is higher than 80% mortgage insurance will usually be required. Mortgage insurance serves to protect us against the borrower being unable to repay the finance. The mortgage insurance premium is normally paid by the borrower. When mortgage insurance is involved, the application must satisfy the lending criteria of the mortgage insurer as well as us.
3. Credit history
The credit history of the applicant(s) is also considered. If an applicant has previously defaulted on a loan, has missed a credit card payment, or has been declared bankrupt, this will reflect on their credit history and will be accounted for when the lender is assessing the application.
4. Verification of financial information
Upon applying for finance, borrowers will be required to provide verification of their financial information including proof of income from their employer, bank statements demonstrating savings, and details on other assets and liabilities. We will require such information to ensure that the applicant meets the appropriate finance criteria.
Some applicants, however, may not be in a position to provide such information. For example, those who are self-employed may not have the ability to provide proof of income. For these applicants, a different type of finance exists – low documentation or ‘Lo-Doc’ finance. On Lo-Doc finance, we do not require the same level of evidentiary documentation as with a “fully verified finance”. As the finance is considered a higher risk to us a higher Ijarah rate may apply and maximum LVR limits are lower than those applied to fully verified loans.
5. What to do if you’ve had a finance application declined
While we may decline an application, this doesn’t necessarily mean the customer can never finance from us at some stage in the future. It simply means that based on the applicants’ current financial situation, the proposed purpose of the finance and/or the borrowers’ credit history, we are not prepared to finance at that time. It may be that a prospective borrower needs to save more, borrow less or wait for a pay rise.
After going through this article, we hope that you have gained a better understanding of obtaining finance and that you will be in a better position to have your next application approved.
At Hejaz Financial Services we offer Islamic home finance for your property. Obtaining Islamic home finance isn’t as hard as you think, we take the stress out of planning, budgeting, and paperwork so you can focus on the important finishing touches for your new home. We have helped countless families finance their dream home, and you are no exception.
Learn more about our Islamic home finance here.