5 things to do before you even consider applying for a mortgage
In September, the total value of mortgage lending in Australia was over $50 billion, Australian Bureau of Statistics shows. This amount is spread over tens of thousands of loans to Australians just like yourself.
What this figure doesn’t show is the number of people who didn’t get past the application stage of their home loan. With that in mind, if you want to collect a home loan and pass go – do these five things before applying to improve your chances.
If you want to collect a home loan and pass go – do these five things before applying.
1. Check your credit rating
Your credit score is a number based on analysis of your past debts and repayments that helps lenders make decisions on whether or not they accept your application. If your score is bad, your lender may approve your loan you less, offer a higher interest rate, or even completely deny your application.
This score is calculated using personal details, the amount of credit you’ve borrowed, the number (and type) of credit applications you’ve made and details of unpaid or overdue debts. Details of any debt agreements or bankruptcies will stay on your report for several years.
There are a number of agencies through which you can instantly check. So have a look, and if your credit score is above 800 (out of 1,200) your credit score shouldn’t give you any trouble.
2. Fix your credit rating
If your credit score’s under 600 you may run into some trouble when applying for a home loan, so it’s worth trying to improve your score however you can. Here are a few handy tips:
- Hire a credit repair agency or contact the financial ombudsman for help.
- Bury bad debt by settling any arrears and paying on time for the next six months.
- Look for mistakes in your credit report and have them corrected by your debt provider.
There are a number of reasons why you may have a mistake on your credit report. It could simply be a mistake due to human error, or the credit provider might have forgotten to notify you that you were late to pay. Furthermore, if you had a payment arrangement in place with your provider, it’s possible that they could have forgotten to update their records to reflect this.
If you find something wrong contact the creditor and ask them to fix the mistake. If you’re not happy with the response, get in touch with the financial ombudsman and ask for help.
Genuine savings is a term used by lenders to describe funds a home loan applicant has saved themselves over time.
3. Avoid further credit and bolster your savings
If your credit report is in good shape, or if you’ve just taken measures to fix it, avoid taking out any more credit as this could hurt your score. Instead pay down your debt as fast as possible and make an effort to put away genuine savings.
Genuine savings is a term used by lenders to describe funds a home loan applicant has saved over time. Generally, the more you have the better your loan application will look.
Some lenders will even require that you have a certain amount if you take out a home loan with a deposit of under 15 per cent. Genuine savings may include: savings, term deposits or shares is they’ve been held for over three months, as well as equity in real estate.
4. Do your own research
Before you head off to a mortgage broker you should find out how much you’re likely to be able to borrow. Do so by using an approximate value of a home you may want to buy, and plugging it into a mortgage calculator, minus whatever money you have saved for a deposit.
When you’ve done so you’ll get a number out the other end – your minimum monthly mortgage repayment amount. Think about this figure – after you consider your income, expenses and other debts how much will you have left over to pay it? Would you have enough if unexpected costs came up?
The main thing lenders will look at is whether your income is large and reliable enough to service the repayments.
As a general guide, you should never have mortgage repayments that exceed 30 per cent of your after tax income. If your repayments are too high, you may have to consider revising your expectations, or delaying your home purchase.
5. Increase your income
Increasing your income is easier said than done, but if you can it may improve your chances of home loan approval. That’s because the main thing lenders will look at is whether your income is large enough (and reliable enough) to service the repayments.
For that reason before you apply for a home loan it’s worth speaking to your manager or supervisor at work. Re-affirm your long term commitment to your job, and ask for a pay rise, and avoid leaving your job (at least until your application is approved).
Mortgage approval can be stressful and difficult. Luckily with a little planning, and some hard work you can make yours easier and increase your chances of success.