Two questions tend to cause the most stress when looking for your new home: Will I get that dream home and will my home loan be approved?
There is only so much you can do to get the property you want, but there are things you can do to make yourself more desirable to a lender. These include checking your credit rating and being completely honest about your work and financial life. Lenders take all these things into consideration when making a decision about your home loan.
Here are some of the things you can do before applying for a home loan.
1. Conduct your own credit check
Every time you apply for a credit card or loan, the provider will run a credit check and get a copy of your credit file. To better prepare yourself for the home loan application process, conduct your own credit check to see what is on your credit file. If you have too many enquiries on your file, a lender will wonder why, and it may affect your home loan application. Knowing what is on your credit file will help prepare you to answer any questions your lender might have.
2. Consolidate and organise other debts
Multiple debts will affect your ability to repay a home loan and could make lenders wary of taking a chance on you. If you have more than one credit card, you might want to look at consolidating your debt. Likewise, if you have a high credit limit that you don’t come even close to hitting, perhaps look at lowering your limit. If you have personal loans, consider consolidating them into a single personal loan or into your proposed home loan. All of this can demonstrate to lenders that you can easily repay your home loan, even if your situation changes.
Luke O’Brien, a mortgage broker with Aussie Home Loans, says high credit limits can harm your chances of approval.
“Credit card limits can be higher than an individual needs. Most people don't max out their credit cards, however, the limits are taken into account when looking at servicing,” O’Brien says. “Therefore, before going for a loan, people should reduce their limits and cancel credit cards that they don't use.”
3. Organise your finances
After you have sorted your debts, you’ll need to look at your other finances to make sure you are putting your best foot forward when you apply. Make sure that you have a good savings history and a safety net should something go wrong. Regular deposits into your savings account demonstrate to a lender that you have stability and can maintain payments for a prolonged period.
4. Stay on top of obligations
You should also make sure that your transaction accounts, credit cards and any other accounts you have are in order with no missed payments or overdrawn periods. A lender will typically ask for six months of statements to review. If you are self-employed, make sure all your taxes and other financial obligations are up to date and in order.
O’Brien points out that blemishes such as “previous defaults and declined applications for credit cards along with numerous enquiries around credit cards or personal loans” can all impact your credit score.
5. Organise and prepare your paperwork
You will have to provide paperwork when you apply for a home loan. It is always best to have your documents prepared in advance, so you don’t delay the loan application process.
Most lenders require the following paperwork:
- Six months of bank statements of every bank account you have
- Last three to four payslips (for PAYG employees)
- Last two years of tax returns (self-employed or contractor)
- Details of other loans, such as the amount, repayments and length. Have statements to illustrate your repayment history
- Credit card details, limits and repayments for all cards
6. Show stability in your life
Lenders like to see that you have stability. If you are considering a major life change, such as switching careers or starting your own business, it may be best to reconsider until you have your home loan. Most lenders won’t look at your application if you are still under probation at work, and most prefer at least 6-12 months of employment at the same company or industry.
If you have just started your own business, you may also face obstacles getting a home loan. While there may be lenders that will accept your application, you may need to wait until you can show some positive cash flow.
Stability isn’t just about your work life. If you are presently renting, lenders will look for stability in your rental history as well. Rental references and documentation showing timely rental payments will help you look favourable to a lender.
7. Stay on top of your expectations
We all want that dream house with the garage and big backyard, but it’s important to be realistic about your expectations. Before applying for your home loan, look at recent sales data for the area you’re interested in and for the type of property you’ll be trying to buy. Also check how much you can actually borrow by using a calculator that will take into account all your expenses and your earnings.
If you have a concrete idea of what you can actually afford and what it will buy you, you will be better prepared for when the lender does their own assessment and offers you your loan. It also means you will be less likely to overborrow and overextend yourself, leading to financial issues in the future.
8. Know your position and situation
Your personal circumstances also affect the types of loans available to you. Are you self-employed or are you classed as a PAYG employee? Are you applying by yourself or as part of a couple or with a guarantor? Do you have bad marks on your credit history? All of these factors can affect the types of home loans that you may be able to get.
9. Save for a rainy day
You’ll also need to set money aside for the other up-front costs associated with a home loan, such as stamp duty, solicitor fees and other costs. It also helps to have a small amount put aside for the costs associated with looking for a property, such as pre-purchase inspections and moving costs.
10. Tell me more
The old adage honesty is the best policy is especially true when applying for a home loan. Tell the lender or your broker about any finance-related mishaps, no matter what they may be or when they happened. Your credit file will show any defaults or declined applications, so your lender will find out anyways. Being up-front allows you to prepare for any questions a lender might have about your credit history.
11. Compare loans before you apply
There are hundreds of home loan options out there, so do some research before you apply for any home loan. Look at your circumstances and then do your research, compare the options that are available to you and then go through the application process.
One important reason to prepare for your home loan application is that all applications and denials will be recorded on your credit file. These will then negatively impact your next application.
12. Speak to a professional
With so many options in the market and so many factors determining whether your application is approved, it can sometimes help to speak to a mortgage broker or financial advisor. A financial planner can help you organise your finances before you apply, while a mortgage broker can assist with the actual application process. A mortgage broker will make sure you have all the appropriate paperwork in order before the application is lodged and take you through the application process step-by-step.
Make sure you are putting your best foot forward when applying for a home loan by making sure you have everything in order. Do this and you’re more likely to get that approval straight away.