Do Mortgage Lenders Need to Conduct a Background Check?

do mortgage lenders need background check
Many Australian adults dream of owning a home. And to bring it to reality, many Aussies take out loans. The loan application process is usually tedious involving a series of paperwork, and even background checks. Mortgage lenders make use of the information derived to determine if the applicant is worthy and at what interest rate the loan will be set.

But are background checks that important? Yes, they are. This post explores ways in which screening checks help protect the interest of lenders.

Credit History Checks

Before approving a mortgage loan, applicants must submit an extensive credit check. This is to ensure that the applicant meets the minimum lending requirement set by the lender. The mortgage lender reviews the applicant’s credit history to get a feel of his/ her spending habits and the likelihood of defaulting on their loans.

The credit score is an important metric that Australian mortgage lenders make use of and it ranges from 0 to either 1,000 or 1,200 depending on the credit bureau calculating it. Furthermore, the lender investigates the type of open accounts and loan repayment history. It also uncovers declared bankruptcy (if any).

Loan approval and interest rates are directly tied to the credit record. With an excellent credit score – say over 800 out of 1,000 – the chances of securing low-interest loan increases. The converse is also true.

Debt-to-Income Ratio

debt to income ratio
A background check also helps the lender find out an applicant’s debt to income ratio. This number determines the likelihood of an applicant defaulting on their loan. In general, lenders prefer to lend money to people whose monthly debt payments are less than 36% of their monthly income, less than 10% is outstanding.

Employment Checks

Lenders also want to make sure that the mortgage applicant is gainfully employed and will be able to make the necessary monthly payments. Mortgage lenders prefer to lend money to borrowers who have worked at their companies for over 3 years because it shows stability; moreover, they are less likely to leave their current jobs.

Mortgage lenders will verify position, salary, and work history, and won’t hesitate to contact the borrower’s current employer. However, the borrower will have to give his/her employer consent to speak to the lender. The lender may also require the applicant’s tax return transcript.

Identity Checks

Mortgage lenders also have to verify the applicant’s identity to protect themselves from liabilities. For instance, it helps them ensure that they’re not transacting with a fraudster. Based on the law, lenders must not lend money to criminals and terrorists. With identity checks like driver’s licenses and the likes, lenders can confirm who the applicant is.

identity and background check

How Criminal History Affects Mortgage Loans

Although lenders are not typically asked to apply for a national police check or a criminal history check, a criminal history can impact a person’s ability to secure a mortgage loan in specific instances.

For instance, if a person has been convicted of financial fraud, it’s going to negatively impact their credit score, which makes it more difficult to secure a loan. As part of the loan application process, the ability to secure insurance is also considered. If a person has been involved in a crime like arson, it might be difficult to get an insurer.

Read also: How to Get Loans with Bad Credit?


Based on all this, background checks are extremely crucial to the mortgage lender because they provide invaluable insight into the risk they’re taking by lending a borrower. Failure to conduct background checks is therefore imprudent.

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By NF_Editor

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