Owning a home is still part of the fabric of the Australian dream, and for many of us, turning this dream into a reality starts with securing a home loan.
There are many tried and true methods to increase your chances of getting a home loan, and like most things, it’s important to be prepared before you even set foot in your lender’s office so you can get the best home loan.
There will be some factors out of your control, but it’s best to tidy up your finances as much as you can and minimise all possible risks before you begin your home loan application process.
Some items may take months or perhaps years to establish, while other matters can be handled much quicker. While it may seem daunting, it’s just a matter of patience, persistence and sticking to that trusty budget.
Here’s a rundown of things you can do right now to increase your chances of securing a home loan.
Save a deposit
This is perhaps one of the most important steps to securing a home loan. Ideally, you’ll want to save 20% for your house deposit plus enough money to cover the stamp duty and conveyancing fees. While this may seem like a lot, it’s just a matter of sticking to your budget each month.
Lenders will look upon you more favorably if you can show them that you’re cable of sticking to a savings plan and have already set aside money to secure your home loan. You can put down less than 20%, however you’ll be up for lender’s mortgage insurance, which will significantly increase your costs over time.
Know exactly how much you can borrow
Many people leave this up to the bank, but it’s important to determine this figure for yourself before meeting with your lender. They’ll simply provide you with the maximum amount you can borrow, which is often different to what you can actually afford. It all comes down to your individual budget.
While the bank will make their own calculation, it’s really up to you to decide what’s affordable for your situation. You’ll need to analyse your budget to see what expenses you have coming out every month in addition to any other financial obligations to get a full picture. Once you’ve accounted for all of your expenses (living expenses, credit card bills, personal loans etc.) and the money you’d like to put into savings every month, you can get an idea of what you truly have left over to contribute to your mortgage each month. This handy mortgage calculator will let you know how much you can borrow.
You’ll look more responsible (i.e. desirable) in the eyes of your lender as you’ve pre-determined your budget and are showing you’re only interested in borrowing what you can afford, not just the top end of what you are allowed to borrow. Check out these apps to help analyse your finances a bit easier.
Establish a stable income & career
You’ll need to show consistent income and career history in order to convince lenders that you’re capable of making your repayments. While it’s quite normal to switch jobs more frequently these days, being able to show you have remained in the same field without any gaps in your job history is important for your home loan application.
Check your credit report
Lenders are more likely to approve your application if you can show them a relatively clean credit file. Make consistent payments on credit cards and phone bills and ensure there are no default payments in the years leading up to applying for your loan.
It’s a good idea to get a copy of your credit report before applying for your loan to make sure all of the claims are correct. If there is a discrepancy, you’ll have time to fix it before the lender pulls the report.
Limit your credit card use & pay cards down
Try combining credit cards if possible and don’t apply for any new ones. This is especially important when you’re applying for a home loan, as a car loan or another credit card are just other forms of debt that will count against you on your application.
Pay your current cards down as much as possible and close out any cards you’re no longer using. You can also try lowering the limits on your current credit cards, as the credit limits on each of your cards are viewed by the lending agency as being fully drawn. For example, if you have a limit of $5,000 on a particular card, even if your balance is only $2,000, the lender will view this as $5,000, as you can borrow up to $5,000 at any time.
Do your taxes
Make sure you have filed all of your tax returns and do not owe any tax money to the ATO as this will make you look very unfavorable in your lender’s eyes.
Make sure your bank accounts are tidy
Generally, lenders will want to see the last three to six months of your bank statements so ensure you haven’t overdrawn or made any late payments during this time.
Create a safety net
It’s a good idea to be able to prove that you have a safety net in place in case of job loss or unexpected medical expenses. This shows your lender that you’re thinking ahead and will be capable of paying your mortgage should something happen, making you a more enticing candidate. This could come in the form of emergency savings account or perhaps income protection insurance.
Don’t apply with multiple lenders
While it’s important to compare lenders, make sure to only submit one application after you’ve finished all of your research as multiple applications will appear on your credit report. Watch out for online lenders as sometimes borrowers mistake inquiries for online applications, according to news.com.au.
Be upfront and honest
Make sure to disclose all of your relevant financial information upfront. While it may be tempting to conceal an overdrawn credit card or overdue car loan, your lender will be able to find this information and they can decline your application due to non-disclosure. It’s best to provide all information up front for an easier application process and to help get the type of loan that’s right for you.
While it may seem daunting, securing a home loan is possible if you follow these basic guidelines. Just remember it’s about playing the long game, and your patience and persistence will pay off when you finally get the keys to the house you’ve been dreaming about!
If you’re having trouble managing your finances, give us a call on 1300 368 322. We’ve helped thousands of Australians gain financial freedom, and we can help you too. Call us today or make an enquiry below to get started.