Pressure from the Australian Prudential Regulation Authority (APRA) and fallout from the banking royal commission has resulted in much tighter credit conditions for refinancers and prospective home owners. If you’re not fully equipped with the right information before applying for a home loan, you are at serious risk of having your application declined!
This list of tips is a must-read if you want to get your home loan approved quickly first time around…
1. Get advice from a mortgage broker
Talk to a mortgage broker who has access to a large number of lenders and knows which one will be the perfect fit for your circumstances. You may not know this, but most lenders specialise in a particular area of home loans, such as:
- bridging finance
- family guarantee loans
- loans for the self-employed
- loans for people whose incomes are based on commissions or bonuses
- interest-only loans.
Most brokers don’t charge any advice fees, so you’d be crazy not to use one. Get in touch with one of our knowledgeable mortgage brokers to discuss your needs.
2. Minimise expenses
It’s wise to start looking at your living expenses at least three months out from applying for a home loan. Review your spending and think about ceasing monthly expenses that aren’t absolutely necessary, such as an under-utilised gym membership, wine club or even a charity. You can always reinstate these after your new loan settles, if your budget allows for it.
Lenders also take into account your financial commitments, such as:
- credit cards
- store cards
- HELP debts
- personal loans
- car loans.
It’s best to close down any unused credit cards or reduce high credit card limits because the lender assumes that the credit card is at its limit even if you pay it off every month in full. If you have debts that are close to being paid off, then consider using some of your savings to eliminate them before you apply for your loan.
3. Check your credit score
The most common reason for an automatic decline is a low credit score or defaults showing up on a borrower’s credit file. Too many credit enquiries due to multiple credit card applications, pay day loans, vehicle loans and multiple home loan applications will all go towards reducing your credit score.
If you have had trouble paying your bills on time, or perhaps you recently moved to a new house and there is an unpaid utilities bill hiding on your credit file, you will need to deal with them urgently because any defaults will show on your credit file for five years! Since March 2014, changes to the Privacy Act have allowed lenders to see the past 24 months of your repayment history on loans and credit cards.
The easiest way to check your credit score is to apply for it online through Equifax. Don’t get tricked into applying for your credit score through any other provider – they will keep your personal information on file and spam you constantly!
4. Consider your income
You need to prove that you have stable employment and income to make your loan repayments. Applying for a loan when you have just started a new job is possible, but your choice of lenders is greatly reduced (most want you to at least be past any probationary period) and you will need your mortgage broker to line you up with the most appropriate lender.
If you’re self-employed, most lenders require you to:
- provide two years’ worth of business financials and tax returns
- have an ABN that’s been registered for at least two years – a small number of lenders will look at businesses that have been registered for less than two years, but you can expect a higher interest rate and application fees.
Demonstrating to a lender that you can save while also meeting your living expenses is an important part of your loan assessment. If you’re an existing borrower looking to refinance or top up your loan then the lender will want to see that you are meeting your current commitments and also tucking some savings away, to demonstrate that you have a sound financial base before going into more debt.
Secondly, your savings provide a deposit to purchase a property. Some lenders will accept rent paid to go towards genuine savings and using a family guarantee will allow you to buy a property without a deposit, however lenders like to see a bit of “hurt money” going into the purchase.
If, like most first home buyers, you don’t have access to a family guarantee to make up the shortfall of your 20 percent deposit, then you will need to save up a considerable deposit to purchase a property. Saving up a 20 percent deposit to avoid lenders mortgage insurance (LMI) can be a monumental task. LMI can help reduce the size of the deposit required to purchase a property but it does come at a cost, so the pros and cons should be carefully considered before proceeding.
Want us to help you on your property journey? Get in touch today.