7 proven tips when applying for a home loan

Many people, even those who have been through the process, can find the experience unsettling when applying for a home loan.

Asides from nervously waiting to hear if you're approved, the application can appear intimidating and making a mistake can delay a timely answer from your lender.

Each bank and lender has different steps involved during the application and assesses you slightly differently, which can lead to confusion.

While we can't cover every scenario in one article, we want to give you seven tips for applying for a home loan to help the  
application process go as smoothly as possible.

1. Do you have a large enough deposit?

Many lenders have strict guidelines about how much you can borrow. This is known as the loan-to-value ratio (LVR), which limits how much of the property's value can be borrowed. And based on that amount determines how large a deposit you will need.

In most cases, you will need at least a 10-20% deposit of genuine savings. In addition, you need to be aware that for most lenders, you can't receive a one-off lump sum from an inheritance or a gift from a family member.

2. Are you able to show genuine savings history?

Lenders want evidence of your savings history if you buy your first home. You can show a genuine savings pattern over time by providing bank statements, usually at least three months.

Some lenders will allow you to use rent paid to a landlord or through a real estate agent as part of your savings history. You can discuss this with your lender if your genuine savings history is insufficient. Your lender is looking to see if you can prove you are responsible and have the ability to repay the home loan.

3. Review your spending habits.

Lenders often review your bank statements, including Buy Now Pay Later (BNPL) programs, searching for unusual spending habits. In some cases, this may reduce your borrowing power, so before applying for a home loan, take some time to reevaluate where your money is going.

4. Be in long-term employment

Before lending you any money, lenders need to be sure you have a reliable source of income. That's why you will find most lenders will require you to be employed for at least six months or self-employed for a minimum of two years before approving you for a home loan.

 

5. You'll need to have your income verified

To prove your income, you must provide your lender with at least two most recent payslips and last year's notice of assessment. The lender will use this information to assess your ability to repay your home loan. If you receive other income, like rental income, family allowance payments or child support payments, you'll need to provide these too.

If you're self-employed, most banks will ask you to provide the previous two years' business financials. In some cases, you might also need to supply your Business Activity Statements (BAS) to verify that your business turnover has been stable since the last financial year.

Verifying your income varies depending on the lender; some may require more (or less) information based on your application.

 

6. Check your credit score

Typically, your lender will complete a credit check when you apply for a home loan. As part of the application, your credit score indicates your trustworthiness as a borrower and reviews your credit history.

Any missed or late payments, unpaid bills or defaults are recorded against your credit history.

So ensuring you meet your repayments on time and reducing any credit card debt can help improve your credit rating.

In Australia, you can check your credit report for free every three months. The information will contain your credit history and credit rating ('score').

 

7. Organise your verification documents

Gathering all your information and verification documents before approaching your lender will help ensure you everything you need ahead of time.

We have a handy checklist you can use to get started.[1] 

Verification documents you will typically need to provide:

• Photo identification, such as your Australian driver's licence, passport or proof of age card. Or any two of the following: birth certificate, citizenship certificate, pension card issued by Centrelink, overseas driver's licence or a household bill (e.g. rates, phone or electricity bill.)
• Proof of income (payslips, notice of assessment or two years' worth of business financials)
• Proof of genuine savings (usually three months' worth of bank statements)
• Evidence of any asset you may own (e.g. car)
• Any other liabilities like credit cards, personal loans, HECS or HELP debt

Some lenders may ask you to provide a list of your monthly expenses. Such as groceries, streaming services, school fees or gym memberships, to get an accurate picture of your disposable income.

Be aware that deliberately withholding or failing to disclose information can be seen as fraud and result in the bank declining your application.

What about an investment home loan?

If you are applying for a loan to invest in property, there are a couple of other things to remember before applying with a lender.

Rental income

When reviewing your application, the bank will consider rental income from the property, and they usually assume that the property is likely to be vacant sometime during your ownership.

The lender will generally use 70 - 80% of the actual rent you receive as rental income. That's why having other forms of income is essential when applying for an investment home loan.

Running costs

Some lenders also consider the investment property's running costs, including strata fees, insurance, real estate management fees, council rates and maintenance fees. If applying for a new investment loan, you may need to estimate these costs, or the lender may provide their own estimate.

Debt-to-income ratio

A debt-to-income (DTI) ratio considers the amount of debt you have compared to your overall income. Typically, lenders use your DTI to assess your ability to manage repayments when determining your eligibility for a home loan.

Wait, before you go house hunting…

If you have done what we mentioned, it's a great time to check how much you can borrow for your next property. Each lender has different ways they calculate how much you can borrow.

So, before spending next weekend looking at open homes, speak to a Ramsey specialist Mortgage Consultant who can review your situation and prepare a pre-approval based on your maximum borrowing power.

Book your appointment or in here or call 1300 001 215.