Gone are the days of carelessly stamping home loan application forms without the forensic scrutiny of expenses. Now, banks want to know exactly what you’re spending your money on – right down to your daily morning latte.
So with that in mind, here are a few ways to improve your chances of being approved for a home loan.
Checklist to getting a home loan
- Watch your expenses
- Prove your ability to repay the loan
- Be wary of credit card limits
- Hold off on any career changes
- Get saving
- Wrangle your debt
- Have a buffer
- Don’t apply with too many lenders at once
- Honesty is the best policy
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 75%. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 17 February 2020. View disclaimer.
How hard is it to get a mortgage?
Unless you’ve been living under a rock, you’ll know the banks have seriously cracked down on home lending.
Take this for example.
According to Mortgage Choice: "in a recent home loan application, a lender identified a $59 purchase the applicant had made at a pet store. The lender went back to the broker and questioned why the applicant had made a purchase at a pet store but did not declare that they had a pet in their loan application. But what the lender didn’t know is that the applicant had actually just purchased a gift at the pet store – they didn’t even own a pet. The lender then went on to request a further 60 days’ history of that applicant’s accounts before finally approving their home loan".
The rest of this true case study is just as surprising. Turns out the applicant purchased a gift at the pet store & they didn’t own any pets themselves. The lender then asked for a further 60 days’ history of that applicants accounts before approving the loan. https://t.co/7FT7PAKPHI— Effie Zahos (@effiezahos) November 8, 2018
In another loan application, Mortgage Choice says a couple provided a detailed breakdown of their living expenses, only to have the lender come back seeking justification for a $26 fortnightly expense for their child’s swimming lessons.
The lender wanted to know whether the expense had an end date because $26 a fortnight over a 30-year term would amount to over $20,000. I’m just going to go out on a limb here and say I think it’s fairly safe to assume there would be an end date, because surely no one is such a bad swimmer they would need to take 30 years of lessons.
It truly begs belief, but these are just some of the many real-life examples of how tough it is to get a loan, according to Mortgage Choice Chief Executive Officer, Susan Mitchell.
“If people want to improve their chances of being approved for a loan, it is paramount they are financially fit,” Ms Mitchell told Savings.com.au.
According to Mortgage Choice, there are up to as many as 15 living expenses that lenders are closely scrutinising. All the usual suspects are there, like childcare costs, groceries and transport, but your reliance on Afterpay or your Netflix addiction are also on their watch list. If any one of these pops up it’ll prompt a “please explain” from the lender.
“Before a mortgage broker submits your loan, they will look at your living expenses in the same way lenders’ credit assessors would and ask you about the spending habits which could decrease your chances of getting a loan approved. This will result in a more robust home loan application and may drastically reduce the time it takes your loan to progress from application to settlement," Ms Mitchell added.
Like it or not, the reality is if you want to minimise the chances of your loan application being knocked back, or delayed, you should consider every dollar you are spending.
1. Spring clean your expenses
If you want to be approved for a loan, Ms Mitchell says you need to knuckle down.
“Most lenders will want to see three months’ worth of living expenses, so it’s a good idea to critically assess your expenses (credit card and bank account statements) six months prior to applying for a home loan and rectify any spending habits you feel are atypical, or could hinder your chances of being approved for a loan.”
Yep, it turns out all those coffee and Afterpay purchases could be seriously hurting your chances of being approved for a loan, so work on minimising unnecessary spending.
Catch the bus to work instead of an Uber (this is one I am currently guilty of....), start shopping at Aldi and curb the online shopping. You’ll save money and could look like a little budget ninja when your lender looks at your bank statements.
2. Prove your ability to repay through your credit history
Being able to prove that you can repay your home loan is pretty much the biggest requirement you have to meet in order to get one.
An institution doesn’t necessarily want to see your written budget, but they will definitely want to take a look at your current living expenses and financial commitments.
Be prepared to disclose everything that involves, and will involve, your finances. This includes sources of income, savings, investments, expenses, any existing debts, and other financial commitments.
You basically want to prove to a lender that you have a clean and stable track record so that when they assess your loan application, your credit rating paints a good picture of you as a borrower.
A series of late or missed payments is a sure-fire way to make sure your loan lands squarely on the rejection pile.
On the other hand, showing that you have a good track record of meeting repayments could demonstrate to the lender you’re a good risk.
3. Be wary of credit card limits
Another thing to be wary of is credit card limits.
When the banks look at your loan application, they generally assume that the credit limit is how much debt you could potentially owe. So even if you have a credit card with a limit of $5,000 but you either don't use it or are up to date with your repayments, they will still assume that is how much debt you owe. Sounds super unfair right?
The higher your credit card limit it, the less money a lender can responsibly lend out to you. So with that in mind, reduce your credit card limit or close it down altogether if you're applying for a home loan.
You stand a much better chance of being approved for a home loan if you stick to just one credit card with a reasonable limit.
4. Hold off on any career changes
Lenders want to see that you can hold down a job. Unless you have $500k hidden away (gimme!), it’s generally your income that will be used to make loan repayments.
Generally speaking, most lenders like it if you’ve been with the same employer for a minimum of six months (not including probation periods).
But if you’ve just started a new job, don't panic yet. In that case, lenders will look at what you did for a crust immediately before your current role. It's usually enough if you've been in a similar role in the same industry for many years (or at least for the past two).
If you're a casual job hopper, the news isn't so great. Most lenders will see you as a wildcard, a risk too great to take on.
5. Get saving
Lenders will go all heart eyed for you if you can show that you have a solid history of saving and that you’ve built up a strong deposit over time.
A 20% deposit is generally recommended. This is because if you borrow more than 80% of the value of your home, you will be asked to pay lenders mortgage insurance (LMI). As the name suggests, LMI protects the lender (not you!) if you can’t meet your mortgage repayments.
The bigger your deposit, the less you need to borrow, the less LMI you have to pay, and the lower the risk you are to the lender. In other words, you’re the perfect borrower. Gold star for you.
However, if you are borrowing more than 80% of the purchase price, you’ll have to provide evidence of your savings. Your savings will usually have to add up to at least 5% of the purchase price of the property to meet the savings requirements of the bank.
It’s also important to remember that buying a home involves more than just the deposit. There are other costs like stamp duty and legal fees you’ll have to fork out for too.
6. Wrangle your debt
Unsurprisingly, being wracked with debt will send most lenders running for the hills. Before you even think about applying for a home loan, get on top of any outstanding debt you may have.
Afterpay and Zip Pay are classified as debts and can be viewed in the same way as a credit card. If you miss a payment and are charged interest, it can potentially be viewed as a default. Just something to be mindful of.
7. Have a buffer
Having a safety net in place is always a good idea anyway, just in case the worst comes to the worst and your income stream stops.
8. Don’t apply with too many lenders at once
Don’t put all your eggs in one basket, right?
It’s important to compare lenders, but submitting applications to several lenders will show up on your credit report. While it won’t have a massive impact on your credit rating, it is frowned upon by lenders and it just doesn’t look very good – especially if you’ve already been denied for a loan multiple times.
It’s a much better idea to compare all your options first, then apply for a loan once you’ve identified the right one for your needs.
9. Honesty is the best policy
Even if you do have outstanding debts, it’s better to disclose that information right at the start. You can be sure the lender will uncover all that information anyway, and your loan will be declined due to non-disclosure because they will question whether there are even more debts that haven’t been disclosed.
Frequently asked questions
1. How long does it take for a home loan application to be approved?
The time it takes to be approved for a home loan can vary. However, if the buyer has prepared all the required documentation, it can take anywhere between three to five business days. More complex situations could take longer.
2. Why is my loan application taking so long?
There could be many reasons why your loan application is taking a long time. Some lenders simply take much longer to approval applications than others, but there could be discrepancies in your application, or the property your buying might be harder to value (especially if it's in a rural location). One of the most common reasons for a delay is the lender not having enough information about you. For faster approval, consider providing more information about you and your finances. Also, having a deposit large enough to save you from paying LMI could also speed up the process.
3. How can I get a same day home loan?
Getting approved for a home loan usually takes a number of days, although a small number of lenders, such as TicToc, promise to offer "instant" home loans where you can apply to purchase a property and be approved in real-time, allowing some borrowers to make an offer that same day without subject to finance knowing that they've got full-approval, not real approval.
4. When should I get pre-approved for a home loan?
As pre-approvals will be visible on your credit file as a loan enquiry, having too many in a short space of time and with multiple lenders could create the impression that you're financially unstable. This is why it can be a good idea to wait until you're seriously considering a purchase, as opposed to applying too early in the process when you may only be entertaining the idea.
5. How long does a pre-approval last?
For most lenders, pre-approval lasts for three to six months. This is because lenders have an expiry date as a borrower's financial situation and the property market can change over the course of a few months.
6. When should I apply for a mortgage?
You should only apply for a mortgage after you have checked your credit history, consolidated any debts, organised your finances and paperwork, thoroughly compared home loans and/or spoken to a professional. This could give you the best chance of being approved for a good-value home loan.
7. Can you buy a house without rental history?
Yes, you don't need to have a rental history to buy a house. Not having a rental history is extremely unlikely to have an effect on your home loan application.
8. How can I buy a house with a bad rental history?
No matter whether you have a bad rental history or not, having a sizeable deposit (ideally 20% or more), minimal debt, and proof of having a stable income can stand you in good stead when applying for a loan to buy a house. Having a guarantor could also help you seal the deal.
9. Can I get a mortgage with only rental income?
As a general rule, most lenders will only consider 80% of your rental income as income. This is because they assume the remaining 20% will be used to cover expenses such as council rates, strata levies, repairs, expenses to cover vacancies, agent's fees, etc. Each lender has a different policy so it's worthwhile checking with your preferred lender.
Saving.com.au’s two cents
If you want to improve your chances of being approved for a home loan, it’s important to be financially fit.
You’ll maximise your chances of obtaining loan approval if you can prove to a lender that you are consistently paying your bills on time, saving on a regular basis, and keeping discretionary spending to a bare minimum.
The reality is, if you want to minimise your chances of being knocked back for a home loan, you have to consider every single dollar you spend.
Get on top of your debt, make sure your credit history is squeaky clean, put a good savings plan in place and you’ll be well on your way to getting your home loan approved.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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