Obviously no one wants to go through all the trouble of applying for a loan only to have their application rejected or declined. But how do you create the perfect home loan application? While lenders are very explicit about what you should show them, they are less forthcoming about what exactly they want to see. In other words, they will tell you what information to include, but they will not necessarily tell you what looks good and what does not.
Above all, the perfect mortgage application will show the lender that you can afford the property, make the mortgage payments on time, and that you are generally a great candidate for loan approval.
Show you can afford the mortgage
Ultimately this is what it's all about. More than anything else, a loan application is designed to show the lender that you can afford to pay back the mortgage.
That said, even if you can afford the repayments, a lender is going to need much more convincing if you're up to your eyes in ongoing expenses (think credit card debt and the like) than if you have little-to-no personal debt.
One of the best ways to show that you can make repayments is to show lenders that you've successfully made other repayments already. While it's possible that this can feel a little bit like a Catch-22, if you've made the effort to stay on top of your bills and pay them back on time you will be a more promising applicant than someone who has had trouble staying on top of their expenses, historically speaking.
Show you can keep your job
Many lenders will make six months of continuous employment – as well as not being on professional probation – a hard requirement for their loans, and it makes sense why: stable employment means a stable income, and stable income means steady repayments on your mortgage. This, obviously, is what lenders want to see.
If you're self-employed, this can be a little bit trickier, because you may not have the standard sort of pay slips that are usually requested. Don't worry. Your goal is to show the lender that you have consistent income. Typically lenders will ask a self-employed applicant for two years of tax returns: this is used to find proof that the business is moving along smoothly and that the borrower is maintaining enough income to meet their minimum requirements for the loan.
By talking to your accountant, and possibly your broker, a self-employed home loan seeker can potentially find a way to explain things like significant one-off expenses to a lender.
Don't rush the application
In some ways, we should have saved this section for last, because this simple advice is possibly the most important piece of the entire process. Since you're not going to lie on your application, the key to a perfect home loan application is that it is completed exactly as requested by the lender.
Because of this, making mistakes could be costly – in fact, it could be the reason your loan application is declined. No one wants to miss out on that perfect piece of property because they forgot to include their most recent payslip and instead used one from three months ago. Be careful, be through, and be organized.
You'll want to make sure, for example, that the paperwork you are filling out matches the information you gave on your initial loan application exactly. This attention to detail will go a long way toward making sure that your application is not rejected for minor inconsistencies or other clerical reasons.
Following up on that in a slightly different direction, it can be tempting to have your broker (if you have one) to send out multiple copies of your loan application simultaneously. You should ignore this temptation.
For one thing, if your application has an error in it – say you forgot to include a source of income or there was another accidental omission – that error will be seen by multiple lenders, rather than just one.
Secondly, no two lenders are going to have exactly the same lending requirements. If one bank is declining you because you are self-employed – regardless of your financial situation – another may be perfectly happy to accept your application.
That said, each loan application will appear separately on your credit file, and some lenders may decline your loan simply because you have too many credit enquiries over a short period of time. It's important to keep an eye on this balancing act.
If your loan was declined, what do you do?
Let's say that the perfect home loan application was not so perfect at all, and you still wound up with a bank turning you down. What's next? Where do you go?
First thing's first, you should ask follow up questions to the lender. Not only could you find yourself being able to overturn the decision – if the bank is looking for more information you have handy but hadn't provided, for example – but even if you don't manage that, you will know exactly why you were passed over, and subsequently you will know exactly what to fix.
If you don't get good guidance from the lender about why your loan was declined, you can take matters into your own hands. You'll want to clear out any credit card debt you may have before applying again, as well as checking your credit file for anything that might be a red flag to banks or other lending institutions. No one wants to find out they have bad credit by having a declined loan, but it's important to know at any rate.
Home Loan Application Checklist
Applying for a home loan is a long and complex process, involving everything from credit and reference checks to verification of employment and income.
To ensure that you have the best chance of getting your loan approved, we’ve compiled a checklist of some of the information a lender may require when assessing your mortgage application. Remember that requirements vary between financiers, so confirm the exact documentation you need directly with your lender or mortgage broker.
Personal Information
- Full employment history
- Current and previous addresses
- Details of your current assets – anything from a car, motorbike, or boat to other properties and the like
- Proof of your income and current outgoing expenses
Employment documentation
- Current records of your salary
- Latest tax return/notice of assessment
- If you are self-employed or cannot easily demonstrate your salary with pay stubs, three years’ worth of tax returns
- A letter from your employer stating the tenure of your employment (if possible)
Other documentation
- Proof of Identification: Enough to pass the 100 point check, which can include your passport, birth certificate, etc.
- Copies of recent credit card statements, confirming your credit limits
- Front page of the sales contract
- Six months’ worth of bank statements to confirm a genuine pattern of savings
- Statutory declaration stating that funds gifted for the deposit do not need to be repaid (if applicable)
- Council rates notice for any properties you own, such as investment properties
- If purchasing an investment property, confirmation of rental income for the property (real estate agency letter)
- Completed application for First Home Owner Grant (if applicable)
If you plan to reduce your credit card limit to improve your borrowing power, make sure you request the reduction with your card provider at least a week prior to applying for the loan. As you need to provide evidence of the decrease to the lender, this allows time for the card provider to send you written notice of your new credit limit.
Costs of buying
First homebuyers are often shocked at the number of expenses involved in buying a property – from legal and bank fees to government charges, the costs add up.
You should budget for these expenses as a general rule, and while they may vary, the some of the most common expenses include:
Lenders mortgage insurance (LMI):
You will need this if you are taking out more than 80% of the property’s purchase price to borrow from the bank. LMI protects the lender against the possibility that the borrower will no longer be able to afford their loan repayments.
Stamp duty:
The taxes the government will put on your mortgage documents and on the property itself. While the actual cost of stamp duty will change depending on where the property is located and a host of other factors, rest assured that this is typically an expense you will have to set aside some money for.
Conveyancing:
The process of transferring ownership from one individual to another through solicitors or conveyancers. This is the actual pen and paper process behind buying and selling of the home, and it won't be free. A good conveyancer, though, will be worth their price tag in the quality of their advice regarding every step of buying or selling a property.
Building and contents insurance:
This is something you need to think about once contracts change hands: the policy that covers the actual bricks and mortar of your property or home (building), along with its chattels, such as carpets, tiles and curtains (also known as contents).
It’s quite common for homeowners to get combined coverage for both the building and the contents, although you can get separate policies if you want – say if you're buying a building as an investment property and don't need to insure what's inside of it.
Policies vary widely in price and scope, so make sure you carefully read the terms and conditions of your building and contents insurance product. Owner-occupiers will have to consider having the contents of their homes insured.
Moving costs:
These can vary from person to person, but generally they include things like utilities connections, cleaning, and removal in addition to the actual cost of paying a moving company (or paying for gas, van rental, and the like if you're doing the moving yourself)
Strata searches and building and pest inspections:
Be sure to organize a strata search and pest inspection before committing to buy a property. Even though this may seem like an unnecessary expense, it's actually anything but: by getting a clean bill of sale on the property before you buy it, you will almost certainly save money in the long run, not to mention the peace of mind a full inspection will give you.
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