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.
Unless you’ve been living under a rock, you’ll know the banks have seriously cracked down on home lending.
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.
In another loan application, 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.”
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.
So with that in mind, here are a few ways to improve your chances of being approved for a home loan.
1. Beat the ‘Netflix test’
If you want to be approved for a loan, Ms Mitchell says you need to think like a lender.
“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, 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, start shopping at Aldi and curb the online shopping. You’ll save money and could look like a budget ninja when your bank statements get a once over.
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 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 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 assessing your home loan application, the banks will take one look at your credit cards and assume the very worst – that is, you’ve maxed them out and are only making the bare minimum repayment.
If you’ve got a whopping credit card limit, reduce it or close down your card altogether.
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 a spare stash of money hidden away, 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 stress. In that case, lenders will look very carefully at what you did for work immediately prior. Often, it’s enough to have been in a similar role in the same industry for the past two years. Just be prepared to provide more information to prove a stable employment history.
The news isn’t so good though if you’re hopping between casual jobs, as the lack of employment stability here is far too risky for a lender.
5. Get saving
Lenders will love 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.
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.