The biggest challenge with buying a home is securing finance. To stand a better chance of being approved the first time, get your finances in order first.
A stronger financial position not only increases your chances of getting approved for a mortgage but also means the process is likely to be smoother.
Four things lenders consider when assessing home loan applications
Lenders take a risk every time they grant a loan. To minimise the risk, they’re going to delve into your personal finances to determine your risk profile. Here’s what most lenders take into consideration:
To qualify for a home loan, you need to have ongoing employment and provide proof of salary. This can be bank statements showing salary deposits for several months, payslips or a letter from your employer confirming salary details.
Contract and casual workers generally need 12 months’ proof of income. If you’re self-employed, you’ll generally need to present financial statements for the last two years.
No surprise here. If you aren’t paying your monthly bills on time, lenders will question how you will meet your mortgage payments. Lenders typically run a credit check to see how you’ve been managing your debt. A poor credit score means your home loan application may be rejected.
Proof of savings
Many first-time homebuyers are surprised to learn that a lack of savings is one reason a home loan application may be denied.
A healthy savings fund improves your financial profile. It reassures lenders that you take your finances seriously. More importantly, it’s proof of collateral. Should an unforeseen circumstance occur, like the loss of a job, your savings can cover mortgage payments until you’re back on your feet.
If you’re living above your means, you reduce your chances of getting a home loan. Driving a flashy car? Enjoying fillet mignon and the finest wine once a week? Lifestyle expenses can affect the outcome of your home loan application.
Maintaining reasonable living expenses proves that you don’t spend recklessly and, therefore, are a lower risk to a lender.
Steps you can take to improve your financial position
With so much financial scrutiny, it’s best to take steps to get your finances in order before you apply for a home loan.
1. Save for a deposit
In Australia, mortgage lenders prefer a 20% deposit. Even if your financial picture isn’t perfect, a larger deposit may persuade lenders to overlook minor issues and grant the loan anyway.
If you’re struggling to get a deposit together, is there someone who can help? Having a guarantor, like a parent, who is willing to sponsor part or all your deposit is one way to overcome this hurdle.
2. Lower your expenses
Even if you can cover all your monthly expenses comfortably, it’s possible that your home loan application may still be denied. That’s because lenders also take into account an applicant’s ability to service a loan.
Too many monthly expenses make them question whether you have enough room in your budget to take on another loan or cover an interest rate increase in the future. So try to keep your monthly bills as low as possible and cut out unnecessary expenses.
3. Maintain a good credit history
If your credit history is less than stellar, work on improving it. Avoid skipping or paying your bills late and don’t acquire new debt. If you do run into hard times, inform your creditors so they can work out a more affordable payment plan for you.
Each mortgage lender has its own criteria for home loan applications. At Well Home Loans, we want your dream of buying a home to become a reality. We’ll assess your eligibility online and within seconds you’ll know if you qualify for a home loan.