Applying for a home loan is a long and complicated process, involving everything from credit and reference checks, to the verification of your employment history and income.

As the law requires your lender to lend you money responsibly, they’ll need to perform a thorough background check to ensure that you’re qualified for the loan you’re applying for.

Here are some of the areas lenders will look into:

  • Your income (including bonuses, allowances, rental income, and the like)
  • Your employment history
  • The number of places you’ve lived in over the last few years
  • Your savings history
  • Your loan repayment history
  • Your credit history and credit score

Why your credit history and credit score matters

A credit report (also known as a credit history report) is essentially a snapshot of your borrowing history. Every time you apply for a loan, credit card, or mortgage, information about these repayments is compiled as part of your credit history, even if the application is denied.

The information in your credit report is used to work out your credit score (or credit rating). Credit scores range from 0 to 1200, with 0 being the worst and 1200 being the best. Your credit score ranks your credit history against those of other Australians.

Lenders can access your credit history via the two main credit reporting agencies: Veda and Dun & Bradstreet. These agencies collect data from numerous sources, including all types of lenders, telephone companies, and debt collection services.  

To increase your chances of getting your mortgage application approved, you’ll need a clean credit history.

Keeping your credit history spotless

It’s best to subscribe to a credit file or identity monitoring service, such as Veda Access or Identity Watch if you’re serious about monitoring your credit history. These services cost around $100 annually, but can give you greater peace of mind, knowing that your credit history isn’t reflecting something that it shouldn’t.

If you’re notified of a change that has been made without your knowledge, you can promptly take action to fix the mistake to avoid having your mortgage application unfairly rejected.

Boost your chances of approval by paying off your debts

Whether you want to take out a loan to buy a property as an owner-occupier or for investment, the fact is high levels of debt can impact your borrowing capacity, according to Paul Thomas, CEO of Gateway Credit Union.

“Lenders want to be sure you will be able to repay the loan without overextending yourself, and they assess your loan application on three things; your income, your living expenses and your current level of debt,” said Thomas. “If your debt level exceeds a certain percentage of your income, it will be extremely difficult for you to secure a home loan for the amount you want.

“Everything from credit cards, car loans, personal loans and existing home loans are taken into account and may reduce your ability to borrow. If you’re planning on applying for a home loan, it’s recommended you pay down as much debt as you possibly can ahead of applying.”

You can use the How Much Can I Borrow? Mortgage Calculator to help you determine your borrowing capacity. This calculator allows you to plug in your information regarding your income, expenses, and debts to show you how much you can borrow. By getting your finances in order and planning ahead, you’ll increase your chances of getting your application approved.