Lenders place a lot of weight on your income and employment when assessing a home loan application. For Doncaster borrowers, the way that income is presented can change the loan amount a lender is willing to offer.
This article covers common mistakes made when income and employment are reviewed for a home loan, and how to avoid them before you apply.
How Do Lenders Assess Income for a Home Loan?
Lenders assess income by checking how stable it is, how long it has been received, and how much of it they will count toward your repayments. Different lenders apply different rules to the same income, so the result can vary between them.
Base salary is usually the most straightforward income to assess. Overtime, bonuses, commissions and allowances are often shaded, which means a lender counts only a portion of them. Some lenders ask for a history of that income before they count it at all. This is why two lenders can give two different answers on your borrowing capacity. You can get a starting point with our borrowing capacity page.
Mistake 1: Applying Before Your Probation Period Ends
Applying while you are on probation in a new job can limit your options, because some lenders want probation completed before they will assess the income. Others will consider an application during probation, particularly if you stay in the same industry.
The trade-off of waiting is time. If you are close to the end of probation, holding off a few weeks may widen the range of lenders available. If you have a signed contract and a clear contract start date, speak to a broker first, as policy differs by lender.
Mistake 2: Assuming Casual or Contract Income Will Not Count
Casual and contract income can be accepted by many lenders, but they usually want to see a consistent pattern of work. The length of history required differs between lenders, so check before you assume a loan is out of reach.
Whether a lender accepts your situation is never certain until it has assessed your documents.
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Book a chat with a Mortgage Broker at Traj Finance today.
Mistake 3: Overlooking How Self-Employed Income Is Assessed
Self-employed borrowers are usually assessed on tax returns and financials over a period of time, not on current cash flow. Taxable income after deductions is what many lenders rely on, so heavy deductions can reduce the loan amount available.
Lenders may also look at business structure, how long you have traded, and whether income is rising or falling. If your income has dropped recently, some lenders will average it, which lowers what they count. Our pages on loans for business owners explain how this works in more detail. For tax questions, such as the effect of deductions, speak to your accountant.
Mistake 4: Ignoring Existing Debts and Spending
Existing debts reduce how much you can borrow, even when you never miss a repayment. Credit card limits count in full for many lenders, whether or not you use them. Buy now pay later accounts and personal loans are also considered.
Closing unused cards or reducing limits before you apply can lift your borrowing capacity. The trade-off is that you lose that access to credit, so make sure you are comfortable without it. Lenders also review your spending on bank statements, so regular, consistent habits help.
Mistake 5: Not Planning for Changes in Income
Income changes such as parental leave, a move to part-time work, or a career change can affect how a lender assesses you. Planning the timing of an application around these changes gives you more control over the result.
Some lenders will consider income from a return-to-work date, while others will want you back in the role first. If you are planning a change, talk to a broker before it happens so you can choose a lender whose policy suits your timeline. If you are buying for the first time, our first home buyers page covers the other pieces to think about alongside income.
Why Does Income Affect Your Loan Options and Pre-Approval?
Your assessed income determines the loan amount a lender will offer, and a home loan pre-approval is based on that assessment at a point in time. If your income or employment changes before you sign a contract, the pre-approval may be reviewed or withdrawn.
A lender also tests your repayments at a buffer above the actual rate, so the income needed is higher than the repayment you will pay. As an illustrative example only, at a rate of 6.75% p.a. on a $600,000 loan over 30 years with principal and interest, repayments would be about $3,892 a month. The right rate for you depends on your deposit size, loan features and lender. Use a calculator to test different loan amounts, and keep in mind that a higher assessed income is what lifts the figure a lender will offer.
If your loan is already in place, our loan health check can show whether your current structure still suits your income.
Talk to our team at Traj Finance about your income and employment before you apply. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
Can I get a home loan while on probation in a new job?
Some lenders will consider an application during probation, while others want it completed first. Policy differs by lender, so speak to a broker about your circumstances.
Do lenders accept casual income?
Many lenders accept casual income if you can show a consistent work pattern. The history they need varies, so comparing lender policies is worthwhile.
How is self-employed income assessed?
Lenders usually rely on tax returns and financials over a period of time. Heavy deductions can reduce the taxable income they count, so speak to your accountant about tax matters.
Do credit card limits affect my borrowing capacity?
Yes, many lenders count your full credit card limit, even if the balance is zero. Reducing or closing unused cards before applying can improve your borrowing capacity.
