Getting approval for a home loan is challenging at the best of times, let alone when interest rates are skyrocketing.
A home loan application is filled with many hurdles you need to jump. One of the biggest mistakes applicants make is failing to understand all the criteria lenders use to assess your credibility as a borrower. These factors will include anything from your credit score, earning capacity, deposit and debt-to-income ratio on the loan.
Luckily, there are simple things that anyone can do to dramatically improve their chances of achieving home loan approval. We wanted to share five of these and get you one step closer to financing your next property purchase.
1. Find cheaper alternatives and be smart with your spending
The post-COVID economy has put a lot of pressure on household budgets.
Now might be as good a time as ever to review your current spending and identify potential areas where savings can be made. This doesn’t have to mean cutting items out of your budget entirely. Instead, you may be able to find cheaper alternatives to help you limit your weekly expenses.
For example, avoid dining out in favour of cooking at home and look for cheaper brands instead of high-end ones.
When applying for a loan, lenders will look closely at your spending and use it to determine your overall capacity to service a loan. A disciplined savings record is looked upon favourably and may boost your borrowing credibility in the eyes of the lender.
Additionally, even small changes to your budget will add up over time and help you save for a deposit faster. Use of budget planning calculator to help plan out your monthly cost and repayments.
2. Check and improve your credit score
When applying for a loan, one of the first things a lender will do is check your credit score.
Your credit score is determined by your borrowing history and record of making repayments on time. Lenders use this number to get an initial picture of your ability to service debt.
Overdue bills and outstanding credit card payments will hurt your credit score, thus limiting your credibility from the lender’s perspective. Building a strong credit history of timely debt repayments will go a long way towards bolstering your loan application.
To improve your credit score, pay off any outstanding loans and bills. You should also ensure all current bills are paid on time, avoid using multiple credit cards and check your credit report for inaccuracies.
To check your credit score, you can contact one of the following credit reporting agencies for a free report:
3. Have a consistent savings strategy
When you decide to buy a home, having a savings strategy to help reach your goal deposit should be at the top of your priorities. Not only can a healthy deposit save you from needing to pay Lender’s Mortgage Insurance (LMI), but it can also increase the amount you are able to borrow.
Lenders need to be confident that they won’t be losing any money on a loan. This is why banks favour applicants who put down a healthy deposit, with the deposit used to offset their financial risk if something goings wrong. If your loan-to-value ratio is below 80 per cent, lenders will feel confident they can recover their losses even if the property is sold for less than it was bought for.
Whilst you may be able to get a loan with a loan-to-value ratio above 80 per cent, the cost of LMI can be significant and your borrowing capacity may be limited.
Having a consistent savings strategy in place can go a long way towards securing your home loan. Additionally, breaking down your budget into weekly or monthly instalments will also help you plan a timeline for when your deposit will be ready.
However, remember that there are many hidden costs involved with purchasing a property that you will also need to cover.
4. Avoid a sudden career change
The stability of your employment is a key factor that lenders look at when assessing your home loan application.
Lenders want assurance that you have a reliable source of income to service your mortgage. Sudden changes to your employment before applying for a home loan may add uncertainty for lenders and hurt your chances of approval.
Whilst changing jobs may be necessary for your career or lifestyle, try to resist the urge before your mortgage application. This is particularly relevant if you’re switching to a less stable source of income, such as starting a small business or self-employment work.
As a general rule, the longer applicants have been in their place of work, the stronger their application is likely to be viewed.
5. Use a guarantor
Before approving your home loan application, a lender needs a guarantee that they will be able to recover the loan amount if a borrower defaults on the loan.
If a deposit worth at least 20 per cent of the loan value cannot be reached, borrowers are generally left with two solutions. The first is to take out Lender’s Mortgage Insurance (LMI), which can be costly. The second is to have a guarantor secure your loan.
A guarantor is when someone, usually a parent, provides a guarantee for the repayment of a loan. This means the guarantor is legally responsible for paying back any losses if the borrower cannot repay the loan. This ‘guarantee’ curtails the risk of a lender losing money and will boost your chances of home loan approval.
Using a guarantor is a great way to get into the property market sooner without facing hefty LMI costs.
However, before asking a close family member to be your guarantor, be mindful of the potential risks involved. Guarantors must offer up their own equity as collateral to guarantee the repayment of the loan. This means that if you default on the loan, the guarantor will have to use that equity to bail you out, which may add significant strain to your relationship.
If you’re looking for additional advice with your next home loan application, it’s essential to reach out to your mortgage broker.
To book a free consultation with one of our finance professionals, visit our website or give us a call today. You can also use our home loan borrowing calculator, which can give you a guide on your potential borrowing capacity.