The Great Aussie Dream, the one where we all own a home, can be challenging in reality. With housing costs on the rise, paying the full amount in cash simply isn’t an option for most people anymore and this is the reason home loans exist.
As such, it’s important to know what you should prepare for before applying for one. Whether you are buying a home to use as your primary residence or as an investment property, here’s an overview of what banks are looking at in making their decision about your mortgage loan application.
Your Credit Rating
Your credit rating, or credit score, is an indication to lenders of how likely you are to repay your loan based on your history and current standing with other creditors. It takes into consideration things like the amount you owe, whether you have a history of late or missed payments, your debt-to-income ratio, and experience with a variety of credit types over time.
Checking your credit rating is quite easy. Several online services allow you to do so free. If you have a credit card, you can check with your credit card provider as many of them offer this service. You can also consult with national credit reporting bodies such as Equifax Australia and Experian to know your credit rating for free.
If you find out that you have a low credit rating, you can employ a few simple ways to raise it such as…
- Paying bills on time
- Paying off debts
- Keeping your credit card balances low
Your Assets and Income
Your assets represent what you currently own. This can include any other personal or investment properties, investment accounts, cheque accounts, and savings accounts as well as cars and businesses. You’ll need to provide your lender with statements from any accounts you plan on using to pay for the property you plan on purchasing.
Your income also plays a role in your mortgage eligibility. Lenders need to know that you make enough money to cover your monthly mortgage payments. They typically include a buffer as well to ensure that you could still meet your repayment obligations if interest rates were to rise.
The percentage of the home’s value that you can afford to pay up front is another key factor. Most lenders like to see a lower loan-to-value ratio (LTV)—the ratio of a loan to the total value of the property—and paying at least 20% in cash is recommended. However, it is still possible to get a mortgage at a higher percentage (i.e. 10% cash payment and borrowing 90% from the bank), albeit usually with a higher interest rate and required lender’s mortgage insurance (LMI). Depositing a larger amount demonstrates to lenders that you are skilled at managing your money and living within your means.
Your Outstanding Debts
The amount of debt you currently have is another major contributor to your ability to qualify for a mortgage. Banks will look at every debt you currently have, from credit cards to car loans to other mortgages. The more debt you have, the riskier you will look. However, if you have a positive history of managing your credit cards and other debts well, banks will look at your loan application more favourably.
With credit cards, it is not just the amount you owe, but the percentage of your total limits that you are using as well. For example, someone with $5,000 in credit card debt out of a $20,000 limit will look much better to lenders than someone with the same $5,000 in debt but only a $6,000 limit. If your credit cards are maxed out, it signals to lenders that you are already experiencing financial difficulties and cannot afford to take on more debt.
It is best to pay down your current debts as much as possible before applying for a mortgage. You can also try to decrease your credit limit when you apply for a loan and increase it back to its original limit once your application has been approved.
Boost Your Chances of Getting Approved
Most lenders won’t base their decision solely on your credit score or any other single factor; rather, they will look at your entire financial situation. Working with a financial advisor experienced in real estate for homeowners and property investors is a decision that can boost the chances of your mortgage application being approved.
At Clever Financial Solutions, we offer key advice and assistance to help you achieve your current and future financial goals, such as getting approved for that mortgage loan you’ve been hoping for. Our financial experts will be your committed partners, evaluating your situation and identifying ways for you to find the best solution to bring you a lot closer to attaining financial success.
