7 Tips For Home Loan Approval

Buying your first home may be daunting, but understanding your financial commitments and how and when to apply can simplify the process. Here are tips for home loan approval to boost your odds when applying as a first time buyer.

TIPS

1. Understand eligibility criteria
2. Fix your credit score
3. Maintain stable employment
4. Get your deposit together
5. Rein in your expenses
6. Find a guarantor
7. Apply for pre-approval

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1. Understand eligibility criteria

Knowing home loan eligibility criteria from the outset will make the process of getting a home loan smoother.

Although each lender has slightly different criteria, most require a 20% deposit, a steady employment history or a record of savings to ensure that you can make regular repayments over a term that can run to 30 years. They’ll also check your credit report to ascertain whether your finances are in order before they lend you hundreds of thousands of dollars.

You can easily find a lender’s specific requirements by visiting their website or speaking directly. Alternatively, you can talk to a mortgage broker who can help you find the best possible mortgage and give you a detailed breakdown of what you’ll need to do and what documents you’ll need to make your application.

Your lender will also inform you of any special circumstances that may limit your mortgage options. These may include lacking a credit history if you’re 18 or 19, being self-employed, unemployed, having an unstable employment history, or having past debt issues. In such cases, you may have to consider alternative routes, such as a low-doc mortgage, which is usually more expensive than a standard home loan.

If you’re unsure about your eligibility, you can ask a mortgage broker or the lender directly. If you’re not yet eligible for a mortgage, it may be worth holding off on your application for a couple of years while you work on improving your financial situation.

» MORE: Renting vs buying in Australia: Which is best for you?

2. Fix your credit score

A good credit score is key to getting a mortgage as it shows lenders your financial status and repayment history on credit cards and personal loans. To know where you stand, check your score for free from one of Australia’s three credit rating agencies: Equifax, Experian and illion.

Late payments can hurt your score, but you can improve your rating by paying bills and debts on time for at least six months. If you are unsure how to help your credit score or over what timeframe, contact the rating agencies to determine which steps you can take to get a better rating.

» MORE: Can you get a home loan with bad credit?

3. Maintain stable employment

Stable employment, aka a regular income source, is a key determinant of obtaining a mortgage. Your lender will require evidence of your ability to make regular repayments over a long period of time.

Therefore, it’s imperative that you stay in the same position or organisation throughout the application to demonstrate job stability. There may be exceptions—for example, if you get a new job that pays more. However, your lender will likely want to see a couple of months of payslips from your new employer. Or, at least a record of your savings over the job transition period.

If you are contemplating changing jobs while applying for a mortgage, check your prospective lender’s conditions.

» MORE: What percentage of your income should your mortgage be?

4. Get your deposit together

Most lenders require a deposit of 20% of the property’s value before approving a loan. As the borrower, this is also beneficial as you only have to borrow 80% of the value to secure a mortgage with a healthy loan-to-value ratio (LVR).

That means that if you want to buy a property for $500,000, you’ll have to come up with a $100,000 deposit. While this will be daunting for many first home buyers, it’s a valuable move in the long run.

You can still get a loan with a deposit of less than 20%, but this may involve taking out lenders mortgage insurance — which means throwing thousands of dollars down the drain. Alternatively, you could get a guarantor to act as a security for your loan.

You can do plenty of things to expedite the whole saving-for-a-deposit process. Getting a deposit together not only demonstrates to the lender your ability to repay a mortgage but also teaches you discipline in how you handle your finances, which will also be vital over the mortgage term.

» MORE: 6 money management skills to master ASAP

5. Rein in your expenses

Two things will help you reach your deposit goal sooner: cutting your expenditures to save as much as possible and finding new income streams. Following these tips for approval will also impress home loan lenders with your ability to manage your money responsibly.

Eliminating any lingering credit card debt and unpaid personal loans should be your priorities. These forms of credit typically have much higher interest rates, leading to an unnecessary drain on your finances.

You should also think about ways to save — even on a tight budget. Consider steps such as reducing the number of streaming service subscriptions and taking public transport instead of catching taxis or Ubers wherever possible.

The best way to reduce expenses is to do a budget and work out where you can realistically make savings, hopefully without impacting your lifestyle too much.

» MORE: Financial goals: definitional and examples

6. Find a guarantor

Saving up to $100,000 or more may not only be daunting for a first home buyer but simply unrealistic for some — especially if you are currently renting. One alternative is to find a family member (or even a friend) willing to go guarantor on the loan for you.

Each lender will have slightly different prerequisites for guarantors. That said, it basically involves the said family member or friend taking on responsibility for the loan, at least for the first few years, by putting up their property as a security, should you default or can no longer make repayments. Given what’s potentially at stake, it’s a big commitment for them. However, when able, family members — usually parents of hopeful buyers — will often be willing to help you out so you can get your foot in the property door sooner rather than later.

» MORE: Is buying a house with a friend a good idea?

7. Apply for pre-approval

Applying for home loan pre-approval, or conditional approval, is not necessarily the same as our other tips for a successful application. Still, it gives you an idea of how much you can borrow to begin your mortgage quest in earnest. A pre-approval from a lender is not binding but shows you can meet the lender’s criteria for a certain amount.

Gaining mortgage pre-approval frees you up to start looking for properties in your price range. This may save you the heartache of falling in love with a home you won’t get approved for — or afford.

🤓 Nerdy Tip

The amount a lender is willing to lend you and how much you can comfortably afford to repay is not always the same. Failure to understand the difference can result in mortgage stress in the future, so it’s best to stick to a home loan amount you can afford to borrow.