If you’re planning on refinancing or taking on a new home loan, the first question that usually comes to mind is how likely your application is to be approved. While some lenders may keep their loan approval process secret, there are definitely some things you can do to improve your chances of success. Here are some tips to increase the likelihood of getting your home mortgage approved.
Watch your expenses
Many lenders will want to see your bank and credit card statements. They may want to check three to six months of your records, so they can understand your spending habits, and assess whether or not you’re capable of meeting the repayments on your home loan.
To improve your chances of being approved, keep your expenses in check and cut down on unnecessary costs and after-pay purchases.
Improve your credit score
Before you even think about applying for a home loan, it’s a good idea to get a free copy of your credit report from Equifax, Illion, or Experian (the 3 main credit reporting bodies in Australia). Many people don’t realise the importance of a good credit score until they need it. Knowing your credit score early will give you time to improve it if you need to. As a general rule of thumb, the higher it is, the better your chances of being approved.
Lower your debt-to-income ratio
Taking out a home loan means you will also be taking on more debt to buy that new house. Consider paying off or consolidating your debts, such as multiple credit cards, or any personal or car loans. Lower debt or repayments proportional to your income will show lenders that you can manage your finances, giving you a better chance of being approved for your home loan.
Make it a habit to save towards the deposit
It goes without saying that the larger your deposit is, the lower the amount you’ll have to borrow. And that also means you’ll be more likely to meet the lender’s minimum loan-to-value requirements (LVR).
You can also use your proof of savings to show the lender that you’re financially disciplined, demonstrating that you’re capable of paying your mortgage repayments. It’s a major factor for any lender in the loan approval process. So, make it a habit to save regularly for as long as you can before applying for that home loan.
Reduce your credit card limit
Most of us never spend up to our credit card’s limit – and to be honest it’s sometimes nice to know that there’s a buffer there to use in the case of an emergency. But a high limit on your credit card can be a disadvantage when it comes to applying for a loan. If, for instance, your credit limit is $10,000. the lender will assume you have to meet the minimum monthly repayments for that amount even though you may keep the actual balance under $500.
Keep in mind that lenders don’t just assess your application based on the money you owe, they also check how much access to credit you have. To increase your chances of being approved for a home loan, reduce your credit limit to what you actually need, and close any additional cards that you may have. But do it before sending your application, as closing credit card accounts may affect your credit score.
Do your research when applying within 6 months of starting a new job
You may think that starting a new job with higher pay will be good when applying for a home loan. But it may actually lower your chances of being approved because lenders want to see employment stability, and a recent job change may show the opposite.
Most lenders want to see you've been with the same employer for at least the past six months. They may also ask for a copy of your payslips within the same period to check if you're earning enough to repay them. That being said, if your job change is within the same industry, the lender may count this as continuous employment.
The main thing here is to do your research, speak to your broker and check the lenders policy on employment, so you have the best chance of being approved.
Use a broker to help choose the right lender
An experienced mortgage broker will have a panel of lenders they deal with - and they will be able to make recommendations to assist you in choosing the right one. If you need a helping hand to find the lender that's right for you, just visit our home loan solutions page to find out how we can help you navigate the home loan process.