7 things lenders are looking for when you apply for a home loan
There’s more to applying for a loan than a large chunk of savings. According to Mark Edlund, the Managing Director of Clarity Home Loans, the credit environment is more complex than it has ever been. As a result, banks are putting applicants under more scrutiny than ever before.
“As the credit environment becomes increasingly complicated, lenders are continuing to restrict who they give loans to," says Mark.
“Credit reporting in Australia used to be very bland. Now, lenders can see your repayment history on all your outstanding loans for the last 12 months, they can see your conduct for the last 12 months and they can see if you’ve failed to make repayments in the last 12 months.”
Here’s the top seven things Mark suggests you do to ensure your application is as appealing to potential lenders as possible.
1. Pay your bills on time
Banks want evidence you have paid every bill over the last 12 months. We aren’t just talking big bills like paying off loans or electricity, either. Something as insignificant as an unpaid mobile bill might be enough to reduce your chances of being approved. So, make sure you put notifications of regular bill due dates in your phone, put aside money each week so that you have the cash available when a bill arrives, and set up direct debits for all reoccurring bills with set amounts.
2. Make sure you can handle a rise in interest rates
Banks want to see a surplus. They want assurance that if interest rates rise, you can still pay your mortgage. By consistently saving, you’re showing you’re disciplined with your money and more likely to be able to handle rises in interest rates.
3. Don’t have a credit card
There’s a common myth that you need a credit card in order to build a good credit history. This couldn’t be further from the truth. Banks would prefer to see that you have no credit card, or that if you do have one, that you stay on top of your repayments. Today’s society makes going credit card-free a challenge. In this case, keep your limits as low as possible. Lenders today reduce your borrowing capacity for a home more aggressively than they did in the past when you have high credit card limits.
4. Don’t use Afterpay
It’s a bad idea to take on debt when saving for a home loan. You probably already knew that. What you might not know is that debt in any form could negatively impact your chances of being approved. ‘Buy now pay later’ schemes like Afterpay or ‘nothing to pay for X month’ deals can be counted against you when applying for a loan, so avoid them at all costs as they are a signal to the bank that you may be spending money you don’t have.
5. Have a low cost of living
The emphasis in lending is on spending discipline. Previously, people could eat out five times a week and then cut down when they got a mortgage. That’s not the case anymore. Now banks want to see a history and evidence of a low cost of living. If you haven’t already, we recommend tracking your expenses and putting together a budget. The Clarity Smart Budget tool is a quick and easy way to do this.
6. Avoid major lifestyle changes if possible
Stability is about more than just strong, consistent savings. It’s about stability in lifestyle. If a major life change – like changing job, getting divorced, having children or taking on debt is unavoidable, speak to one of the brokers at Clarity as soon as possible. They will provide you with strategies to manage the financial impact of the change.
7. Avoid multiple credit inquires
Whenever you apply for credit, the credit bureau is made aware and it appears on your credit record. This is called a credit inquiry. Lots of inquiries, particularly in a short period of time, are viewed by lenders as a sign of credit stress.
Thinking of applying for a loan and haven’t spoken to a broker yet? Not only will the brokers at Clarity help you avoid credit mistakes, they will also provide advice specific to your financial situation.
As Mark puts it,
“A lot of what we do is talk to you about what you shouldn’t do and provide you with advice specific to your circumstances. So, if you haven’t had that conversation already, you should book it in as soon as possible.”
Get in contact with Clarity today for advice and access to thousands of loans products that one bank can’t offer.
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