How to get a home loan
Here’s a checklist of tips for making sure your hunt for a home loan is smooth sailing all the way:
- Show your ability to repay
- Check and improve your credit rating
- Remove unnecessary financial commitments
- Have a strong savings history
- Show that you have a ‘safety net’
- Don’t apply with too many lenders at once
- Maintain stable employment
- Disclose all information to the lender
1. Make sure you can show ability to repay
Being able to show that you can repay a home loan is one of the key requirements for lenders. Although an institution won’t want to see a written budget as such, they will want to explore your current living expenses and financial commitments.
If your overall repayments are going to increase, the lender will be interested to see where the money will come from. Rent you are paying currently may cease, you may also be putting money away in savings or paying extra on your personal debt to pay it down quickly.
All of this can help evidence that you will be able to meet the repayments on the loan.
2. Check your credit rating
Borrowers should make an effort to regularly check their credit report. This will give you an idea of how many times your report has been accessed in the past few years and if you have any defaults or negative repayment history recorded.
By checking your credit report earlier on, you will know what it contains before a lender accesses it. If there is anything on it that isn’t correct, you have time to contact the company that recorded it to get it corrected.
Having late or missed repayments on any of your debts is not going to look good when you apply for a home loan. On the flip side, showing that you are diligent with your repayments will show the lender that you are a good risk.
March 2014 changes to the Privacy Act mean that lenders have the ability to see the past 24 months of your repayment history. Although it will take some times for these changes to be executed, now is the time to make a change.
3. Cut down on unnecessary financial commitments
Financial commitments and personal debt can impact your application in two ways. Firstly, when you originally applied for the debt there would have been an enquiry on your credit report. Too many credit enquiries can be detrimental to your credit profile.
Secondly, the credit limits on all of your cards are included in your repayments as if they are fully drawn. Credit cards, store cards, interest-free facilities and other personal loans can mean that you have less surplus cash available to meet repayments on a new loan.
Before applying for a home loan, review whether your interest-free card or store card is still being used and if not, cancel them. You can also look to reduce the limit on your credit cards to help increase your borrowing power.
4. Have a savings history
Showing that you can manage your expenses and save money is a big tick for lenders. Savings serve two purposes when borrowing; Firstly, the amount of money you put away can be used to meet your loan repayments. Secondly, your savings form part of your contribution to the purchase.
The larger the contribution the less you need to borrow and the lower the risk you are to the lender. If you’re borrowing more than 80% of the purchase price, many lenders require evidence of savings. Your savings will need to add up to around 5% of the purchase price of the property to meet the genuine savings requirement of many banks.
So on a $300,000 purchase, your savings will need to add up to $15,000. Saving a larger deposit may also help reduce or avoid fees like Lenders Mortgage Insurance, and potentially you could be offered a more competitive interest rate as well.
5. Show that you have a safety net in place
Having adequate personal insurance is good advice, but lenders don’t generally enquire about it. Most people do it for their own peace of mind and when you take out a home loan it is a great opportunity to review your cover.
A buffer of funds can help provide a safety net in case your income stops. Most people either continue to save after they have taken out a home loan or hold back some of their savings to provide a buffer.
6. Don’t apply with too many lenders
Although it is important to compare lenders, submitting applications to several different lenders at once will appear on your credit report. Only submit an application after you have completed your research and have decided to go with that particular lender.
7. Try to have stable employment
Employment stability is important, as this is generally the income used to meet repayments. If you’ve had the same job for several years, this is a big tick. Most lenders prefer borrowers to be with their current employer for at least six months, not counting probation.
If you have changed jobs recently, then lenders will look carefully at what you did immediately prior. Being in a similar role in the same industry for the past two years can be used to satisfy the lender’s employment requirements, so be prepared to provide more information to prove a stable employment history.
8. Disclose all information
It is important to disclose all relevant information when you apply for a home loan. If during the process lenders uncover credit cards or other debts, the loan may be declined due to non-disclosure because there could be questions about whether there are even further debts that haven’t been disclosed.
Being upfront about any other issues can also help the application proceed more smoothly. It could help save time and effort up front, ensuring that you are applying for the right loan.
Getting approved for a mortgage
Getting approval for a mortgage is a daunting process – between the meeting with the mortgage lender, making an offer, filling out paperwork and organising your finances, there’s a lot to think about. By following these 10 simple tips, you could be one step closer to applying and owning your dream home – with one less stress!
Learn more about Home Loans
Applying for a Home Loan Checklist