How to apply for a home loan
Here's how you can organise your home loan application so you get the loan you need for the house of your dreams.
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You've just signed a contract to buy a house. Your deposit is saved up. Settlement day is approaching. Now the biggest thing left on your to-do list is to apply for a home and get a lender's approval.
Applying for a home loan can be broken down into a series of simple steps. And the more you prepare for the application beforehand, the easier the whole thing will be.
If you have all the paperwork you need, have your spending under control, a deposit saved and a clear idea of your finance needs then you'll be in a much better position to get your application approved.
What is the home loan application process?
Before you get your own application organised it helps to understand all the steps involved.
Keep in mind that property purchases are complex processes and the home loan application is just one part of it, so the exact process may differ for you.
But here are the basic steps of the process:
Initial enquiry or conditional approval
Find a lender and a home loan that suit you. Start by comparing rates online, looking at lenders' websites or you can talk to a mortgage broker.
Once you've found a suitable loan you can submit an enquiry or initial application. At this stage you're not locked into anything, and as long as it's not a full home loan application it won't affect your credit score. The lender can assess your basic eligibility and give you a rough idea of how much they will lend you.
Depending on the lender, you may be able to receive pre-approval or conditional approval. This gives you an indication of how much the lender will lend you, but is not a formal home loan approval. This is a good first step, especially if you are buying a property at auction.
Documents and application submission
Once you have a property and a contract of sale you need to submit a full application. Your lender will require documents such as:
- Identification documents
- Proof of income documents
- Asset and liability documents
- Extra documents (for guarantors, bad credit borrowers and other unique cases)
Verification and credit check
Once the lender has your application it will check the documents and verify your identity. The lender will also perform a credit check.
Before a lender can approve your home loan application it will need to conduct a property valuation. The lender needs to work out how much your home is worth – and it won't simply take the sale price as evidence of this.
The nature of the valuation depends on your property. A lender may require a physical, in-person inspection by a professional valuer. But if there's enough available data on the property, and your application is relatively low-risk, the lender may opt for a desktop valuation. This means the valuation is conducted online via software.
Finally, the lender approves your loan. You are then sent a loan contract or letter of offer which you will need to sign. This can involve a lot of paperwork, even when going with an online lender. But some lenders can do almost everything online now.
You may need to have some signed documents witnessed before they can be sent to the lender.
Once the loan is processed you have to wait for settlement. This is when your lender, your conveyancer and the conveyancers of the other parties (lenders and the seller) will finalise the changes in ownership and the release of funds to cover the purchase.
In the meantime, your conveyancer will also conduct some enquiries about the property and the property title. You may also need to get adequate home insurance to satisfy the lender ahead of settlement.
Now that you have a better understanding of the application process, let's explore the steps you can take to make a stronger application.
Before you apply for a home loan
Put yourself in a stronger position months before your home loan application begins by looking carefully at your spending and income.
Lenders will scrutinise your home loan application and are more likely to reject you if your spending is too high relative to your income. How high is too high? Each lender has its own eligibility criteria. But as a general rule, if your mortgage repayments would take up more than 30% of your monthly income you become a higher risk applicant.
A lender will likely ask you to assess your monthly spending broken down into various categories (spending on utilities, food, entertainment, transportation). But don't be too rough in your estimate. Your lender will also look at your bank statements and other financial information. If you drastically underestimate your spending it won't help you.
Trim your spending 3 to 6 months before applying for a home loan
A lender will look at your recent spending, usually the last 3 to 6 months before you apply. To maximise your chances of approval, try to avoid making big, unnecessary purchases during those months.
If you have to make a large purchase be sure to keep receipts so you can demonstrate that the purchase was a one-off. Spending $2,000 on a new television will blow out your spending on any given month, but you're unlikely to buy a flatscreen TV every month. Regular, large purchases are a much bigger red flag.
Anything you can do to trim down your spending can help your home loan application. Here are a few suggestions to get you started:
- Review your recent spending and start tracking this via an app if you aren't already. Identify areas where you are spending too much and see if there are any obvious ways you can cut down.
- Make a budget. Once you've reviewed your spending you can start to set a realistic monthly budget. Having a budget written down should hopefully make it easier to follow through and actually spend less.
- Look at those small, ongoing monthly costs such as streaming service subscriptions and memberships. You might be better off rotating between services rather than, say, paying for Stan and Netflix each month. A gym membership is probably a very sensible expense: if you use it. If not, consider cancelling.
Your property affects your application
The property you are looking to buy impacts your home loan application. This is because the property acts as security, meaning that the lender can recoup its loss if you can't repay your loan by taking and selling the property.
If the lender feels the property will be hard to sell or is worth much less than you're paying for it, your application may be rejected.
If you are buying a small apartment in a postcode where there are many apartments being built, your lender may be hesitant to lend to you. Or it may agree to lend you a smaller amount relative to your deposit size (say, 70% of the property's value rather than 80%).
You may also struggle to get a home loan approved if you're buying in remote areas or towns where property prices are falling (such as post-boom mining towns).
There's no need to panic. But when applying for a home loan it's good to check with a lender before submitting a full application. You can tell it the address of the property you're interested in, or check if there are any restrictions on lending for apartments in the postcodes you're interested in.
It's better to clarify with a lender before you go through an entire application. Not only is that a waste of time, but having a loan application rejected looks bad on your credit report.
Check your credit score
Once you apply for a home loan or start the process with a broker, the next step will be a detailed check of your credit report. But there's nothing stopping you from checking it yourself before you apply. Doing so could help you identify any credit problems you may not know about. You might even find credit problems that are mistakes, and getting those rectified before applying will help your chances of approval.
You can check your credit score for free through Finder.
More home loan application tips and help
If you think the whole process of finding and applying for a home loan is simply too much effort, or even if you're still a bit confused and need some help, talk to a mortgage broker. A mortgage broker is a qualified professional who can not only help you find a home loan but also help you through the entire home loan application process to the approval stage.
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