Hey there, fellow sole traders in New Zealand who are thinking about buying a home! Get ready for a wild ride because purchasing a house is no small feat. But don't worry, I'm here to give you the lowdown on what banks will consider when you apply for a home loan.
Income and employment stability
Firstly, your income and employment stability will be scrutinized to ensure that you have a steady stream of income to repay the loan. For sole traders, banks will look at the income generated from your business and how stable it is. If it's a bit erratic, banks may consider you a high-risk borrower, which could result in less favorable loan terms or even a declined application.
Your credit history is another crucial factor that banks will check. They will review your credit report, which shows your credit history and past repayment behavior. If you've had some bumps in the road with loans in the past, it could negatively impact your loan application.
The loan-to-value ratio (LVR) is the ratio of the loan amount to the property value being purchased. Banks in New Zealand typically require a minimum deposit of 20% of the property value, meaning the maximum LVR is 80%. However, some lenders may consider higher LVRs, but borrowers will need to pay lenders mortgage insurance (LMI).
Your debt-to-income (DTI) ratio is another factor that banks will consider. This is the ratio of your total debt payments to your income, and the borrower's DTI ratio should be below a certain threshold, typically 40%, to be considered for a home loan. So, if you're carrying a lot of debt, it might impact your chances of getting a loan.
Property type and location
Banks will also consider the type and location of the property being purchased. Properties in desirable locations or those with good resale potential may be viewed more favorably by lenders. And, banks may have specific lending criteria for different types of properties, such as apartments or rural properties.
Last but not least, your savings and financial history may also come into play. Having a solid savings record and a good financial history may increase your chances of being approved for a home loan.
So, if you're a sole trader in New Zealand looking to buy a home, keep these factors in mind. By doing so, you'll be one step closer to securing your dream home. Good luck out there!