It’s the resources that you don’t have, as much as what you do have, that will dictate whether a bank will be willing to issue you with a mortgage. This includes the underlining amount they will agree to, and whether this will suit your budget and needs.
In saying this, the bank will want to have a dig into every piece of information that can prove to them that you are financially prepared to enter into a loan, and most importantly, that you can be trusted enough in terms of your financial capacity to tend to it for its lifetime. Being transparent from the start is the first step towards gaining the tick of approval.
Whilst it doesn’t come easy – having to disclose your spending habits, debts and financial commitments with a stranger behind a desk who you’ve only just shaken hands with – your end goal shouldn’t stray far from keeping you grounded; to become the owner of a new home and to start building valuable equity from it.
As a result of tighter lending laws, banks have had to knuckle down on their criteria and there are a few things that may now impact a buyer’s borrowing power more than before. So here are 5 of them to become mindful of when first approaching a lender for a home loan.
1. Your credit cards
With thousands of Aussies owning a credit card, it’s not unfamiliar for a lender to be informed of a borrower having one, or a few, but it’s the way the borrower has been managing their credit that matters more.
It’s vital to make sure as much debt as possible is paid off on your credit cards before applying for a home loan, and if the total amount isn’t paid off yet, then it’s important to keep on-top of repayments in order to come across as responsible and organised.
If you have multiple credit card debts, or are struggling to tend to repayments, the bank might gather that you likely don’t possess the financial capacity to tend to a substantial loan in addition to these other commitments.
Furthermore, in terms of any credit cards that are open but not being used, it’s advised they be closed, or their limit be minimised. Consolidating multiple debts into one loan is another avenue worth exploring, and a bank may also give you the option to merge these debts into your mortgage, but it depends on each lender’s means of assessment and whether they consider it a suitable move.
In addition to any current debts, the bank will access your credit history, so it’s a good idea to obtain a copy of this first and raise any discrepancies earlier on. On some occasions, outdated red flags can be removed from your file with the aid of a credit repair service.
And even if you did stumble upon financial hardship in the past, it doesn’t always mean the bank will go on to deny your loan application, although they may require you to openly discuss what led to the red flag and be able to prove to them, often with financial records, that you are now on better ground.
2. Your assets
Possessing further assets, whether they be a car, investment property or rental, will provide the bank with added security when issuing you with a loan – especially if for any reason you happen to become unable to continue making repayments.
They will also take interest in the value of these assets, and how much profit each has turned over or added towards extra savings.
3. Your income and savings
One of the main figures the bank will want to see is your income, and they may also ask for pay cheques from the few recent months. Therefore, it’s particularly important for those who are self-employed to keep their records up to date.
A stride on from this, having a pool of savings and being able to show active contributions towards it, is a sure-fire way to help get your application across the line.
4. Your living expenses
Living expenses, especially when it comes to managing a family household, can tally up to a considerable amount by the close of the month. The higher this amount when calculated by the bank, the lower your borrowing power could be.
Therefore, it’s a good idea to draw up all your living expenses, utility payments and outgoing flow of cash into a spreadsheet. From there, you can become versed on any detrimental spending habits, with the prospect of pulling them back before applying for a home loan.
This strategy is not only a good financial spring clean but can also direct more extra income into your savings account, or into the deposit for the property.
5. Your deposit
The lower your saved deposit is, the higher your mortgage will be. And the more you request to borrow from the bank, the more borrowing power you will have to show.
Whilst Lenders Mortgage Insurance (LMI) allows a borrower to take out a loan with less than a 20% saved cash deposit, the bank’s screening will still be thorough, not only for their own assurance, but to also assure the insurance provider who are issuing them with the insurance product.
LMI does not have to be paid up-front, although it can be, but having the amount rolled into your mortgage will make your monthly repayments higher – and the bank will want to be sure of your financial capacity to meet these throughout the entire life of the loan.
For a buyer to best uncover their borrowing power, it’s advised they engage with a mortgage broker, and prior to directly approaching the lender for a home-loan application.
Based on the borrower’s income, assets, living circumstances and other financial commitments, a mortgage broker will be able to uncover the most suitable loan product for them, guide them through the sometimes nerve-wracking application process, and prepare them for areas in which the bank will assess them on.