Reviewing Income Sources During a Home Loan Application: A Guide to Maximizing Your Borrowing Power
One of the most critical aspects of a home loan application in Australia is the review of income sources. Lenders need to assess an applicant’s income to determine their ability to meet mortgage repayments. However, not all income is treated equally, and different lenders have different policies regarding what they consider as acceptable income. This is where a mortgage broker plays a vital role—by structuring an applicant’s income optimally, they can significantly increase the chances of approval and secure better loan terms.
How Lenders Assess Income for a Home Loan
When evaluating a borrower’s financial position, lenders look at various income sources to calculate the applicant’s borrowing capacity. They typically assess:
1. Primary Income (Salary or Wages)
Full-time Employment: Lenders prefer stable, long-term full-time employment with at least six months in the current role or two years in the same industry.
Part-time & Casual Employment: Most lenders require at least 6–12 months of consistent employment in a part-time or casual position to consider it as stable income.
Overtime & Bonuses: Some lenders include overtime and bonuses, but they may only accept a portion (e.g., 50–80%) and require a proven history of earnings over 1-2 years.
2. Self-Employed & Business Income
Self-employed applicants must provide at least two years’ worth of tax returns and financial statements.
Some lenders accept low-doc loans (requiring an accountant’s declaration and business activity statements) but often require a larger deposit.
A broker can match self-employed applicants with lenders who consider alternative income verification methods.
3. Rental & Investment Income
Rental income from investment properties is typically included, but lenders apply a “rental income shading” (e.g., using 70–80% of rental earnings) to account for expenses like vacancies and maintenance.
Dividend income and share investments are often considered, but some lenders require a consistent history of earnings.
4. Government Payments & Other Income Sources
Certain benefits, such as Family Tax Benefits (FTB), child support, and pensions, may be included, depending on the lender’s policies.
Car allowances, commissions, and profit-sharing bonuses are often partially accepted.
Foreign income may be accepted but requires additional documentation and proof of consistency.
How a Mortgage Broker Can Improve an Applicant’s Position
A mortgage broker is instrumental in navigating lender policies and maximizing an applicant’s income assessment to improve borrowing capacity. Here’s how they make a difference:
1. Identifying the Right Lender
Not all lenders treat income the same way. A broker knows which lenders accept a wider range of income types and which ones apply stricter policies.
For applicants with complex income sources (self-employed, rental income, multiple income streams), brokers identify the most flexible lenders that cater to their specific financial situation.
2. Optimizing Financials Before Applying
Brokers review bank statements, credit history, and financial commitments to ensure that the borrower appears financially responsible.
They advise on debt reduction strategies, such as paying down credit cards or consolidating loans to improve the applicant’s Debt-to-Income (DTI) ratio.
If a lender excludes certain income sources, a broker may suggest additional income verification documents or alternative lenders.
3. Structuring the Loan for Maximum Borrowing Capacity
A broker can present income in the most favorable way, ensuring that lenders assess it at its highest allowable percentage.
They can combine multiple income streams (such as rental and business income) and structure them in a way that meets lender criteria.
If an applicant’s employment is unstable or they have gaps in income, a broker can guide them on securing stable employment before applying.
4. Managing the Application Process for a Higher Approval Rate
Brokers help compile the correct documentation to ensure a smooth and efficient approval process.
They liaise with lenders to address any concerns upfront, reducing the chances of rejection due to missing or unclear financial details.
If an applicant has a low credit score or inconsistent income, a broker can negotiate with lenders who consider alternative credit assessments.
How Buyers Can Optimize Their Financials for a Stronger Application
For applicants looking to maximize their income assessment, here are some steps to take before applying for a mortgage:
Stabilize Employment: Avoid changing jobs before applying, as lenders favor long-term employment.
Reduce Unnecessary Debt: Pay down credit cards, personal loans, and HECS/HELP debts where possible.
Maintain Good Credit Behavior: Avoid late payments and excessive credit inquiries.
Ensure Savings Consistency: A steady history of savings deposits strengthens an application.
Prepare Proper Documentation: Keep tax returns, payslips, and investment income records up to date.
Conclusion
Reviewing income sources is one of the most crucial steps in a home loan application. Lenders analyze various types of income differently, which can impact an applicant’s borrowing capacity. A mortgage broker plays a key role in matching borrowers with the right lender, structuring income for maximum approval, and optimizing financials to secure the best loan terms. By working with a skilled broker and preparing finances effectively, borrowers can significantly improve their chances of loan approval and securing the best possible mortgage outcome.
