How to increase your chances of home loan approval

Getting a mortgage may seem daunting, especially when lenders seem to be applying more scrutiny than ever to home loan applications. So, we’re telling you about six ways to increase your chances of a lender saying yes.

1. Save regularly towards a deposit

The size of your deposit is one of the most important factors in helping you get approved for a home loan.

Although it’s a myth that you need a 20% deposit to get a home loan, generally, the bigger your deposit, the less you have to borrow, and the more likely you’ll be to meet a lender’s minimum loan-to-value (LVR) requirements. And so, saving as large a deposit as possible is a great way to increase your chances of receiving approval from a lender.

If you’re putting regular savings towards your deposit, a lender will also see this as a sign that you have the financial discipline to keep meeting your loan repayments. That can be a major factor in their decision on whether to approve your loan. So try to put aside an amount each month so that you can go to a lender with at least six months of regular savings.

2. Rein in your spending

When you apply for a loan, your spending will go hand in hand with your saving.

Increasingly, lenders want to look at your bank statements to see where your money goes. So be prepared to have your living expenses closely examined.

To improve your chances of being approved, try to build a track record of sensible spending for at least three to six months before you apply. This means cutting down on excessive lifestyle costs, as well as limiting your spending on items such as alcohol and gambling.

3. Build a good credit rating

One of the key factors a lender will consider when you apply for a home loan is your credit rating. Generally, they’ll take the view that the higher your credit rating, the less likely you’ll default on your loan repayments, and the more likely they are to approve your application.

Your credit rating takes into account factors such as how often you apply for credit and whether you have any defaults, judgments or credit infringements recorded against you. Increasingly, your credit rating also includes whether you’re meeting your credit card and other loan or debt repayments on time.

The reality is most people who fail to pay their bills do so simply because they forget. If you’re applying for a home loan, try not to fall into this boat. Set yourself reminders so that you always pay on time.

4. Get rid of unnecessary credit

Another important factor lenders consider is your access to other credit. Generally, the more debt you’re carrying, the more you’ll have to commit to it each month and the less likely a lender is to approve your loan application.

But it’s not just money you owe that matters when a lender is assessing your application – it’s your access to money that they’re more interested in. For instance, if you have a credit card with a $10,000 limit, a lender will assess your application as though you need to meet the minimum monthly repayments owed on the full $10,000, even if you only owe $500.

To increase your chances of having your home loan approved, you should try to pay off and close down any credit cards you’re not using.

5. Use a guarantor

Before approving your application, a lender will need to know that they’ll be able to recoup their money if you default on your loan. Ultimately, this means being satisfied you have enough property securing the loan.

One stumbling block – especially for first home buyers – is not having a large enough deposit to satisfy the lender’s minimum loan-to-value ratio (LVR).

There are generally only two ways around this: taking out lenders mortgage insurance (LMI) or having a guarantor secure your loan.

While LMI will add additional cost to your loan and therefore impact on the amount you can borrow, a guarantor loan won’t. Instead, the guarantor will simply use the equity in their property as security for your loan. This means if you default, the lender has the option of selling that property as well as yours.

If that sounds drastic, the good news is that many lenders now also allow partial guarantees. Usually known as family guarantees, these allow someone to guarantee your loan up to a certain amount. Then, once you’ve built enough equity, their property is released so that only yours covers the mortgage.

Using a guarantor is a simple way to improve your chances of having a loan approved, but it’s not without risk. So, it’s vital that anyone who is considering acting as a guarantor on your loan receives independent legal advice before doing so.

6. Target the right lender

Finally, it’s worth remembering that, while every lender will want to be confident you can repay your loan, each has slightly different criteria for how they’ll assess your application. To increase your chances of success, it’s important you apply to the right one.

If that sounds like a difficult task, a mortgage broker may be able to help. They’ll take time to understand your individual circumstances and can quickly match you with the lender who’s most likely to approve your loan.

They can also make sure that you have all the information you need to support your application, and guide you through the whole process of applying for a home loan.