Buying a home is an exciting moment and a major milestone for new buyers.
But the process of applying for a loan can be downright confusing. Lenders have strict criteria when evaluating an application. Factors from credit history to employment and even how much you can put down on the loan all affect the rates you can quality for.
A mortgage will likely be your largest expense. So it makes sense to prepare your finances and take steps to put your application in the best possible light. It can mean the difference between getting approved or denied.
So how can you improve your mortgage approval chances?
The key is to be well prepared. Here we look at steps to take before applying for a home loan.
1. Review Your Credit Report
Lenders take on a degree of risk when taking on new borrowers.
To minimise risk, lenders will look at your credit history to assess your ability to repay a loan. Anything from late payments to delinquent accounts will negatively impact your credit rating which will likely affect your ability to secure financing. This is why you should first check your credit report to see if there is anything hurting your credit.
You can obtain a copy of your report from the following credit reporting bodies:
- Dun & Bradstreet
You will be asked to provide your personal information for them to identify you. Any inaccurate information should be immediately disputed. Providing proof of the mistake will help to remove the error from your records.
Your lender will question your ability to repay a loan if you have a history of late payments or delinquent accounts. Pay off any accounts that are delinquent and continue making timely payments on other accounts. If you have any recent late payments, wait for at least six months before applying for a home loan and avoid taking on any new debt.
3. Establish Savings
A way to demonstrate financial responsibility is a genuine history of savings.
It shows lenders you are able to put aside a set amount each month and likely able to handle regular loan payments. Both of these reflect positively on your mortgage application as your savings can form part of your contribution. The more you have saved, the less you need to borrow.
Many lenders now require evidence of savings if you are borrowing more than 80% of a property’s purchase price. Savings will typically need to be around 5% of the purchase price although this depends on the lender. So on a $200,000 loan, you will need up to $10,000 saved to meet the minimum requirement.
Having more saved is better and could mean avoiding fees like Lenders Mortgage Insurance. LMI is designed to protect lenders if borrowers require more than 80% of the purchase price. Saving at least 20% not only means avoiding this fee altogether but could qualify you for more competitive rates.
3. Have a Steady Income
Employment stability is incredibly important.
Lenders will closely examine your financial capabilities which means looking at your employment history. Demonstrating a steady source of income shows lenders you are able to repay the loan. Being with the same employer for several years is a huge plus.
Most lenders typically prefer income from a current employer for at least six months. If you have recently changed jobs, then the lender will look at where you were employed previously. Be prepared to provide details to show stable employment.
Lenders closely examine every detail about new borrowers to minimise risk.
The good news is you can start taking steps to improve your chances of getting approved. This involves reviewing your credit report, establishing savings early on, and having steady employment. Working with a mortgage broker can help point you in the right direction to secure a loan for your dream home.
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