If you’re in the market for a home loan, knowing what factors could potentially derail your mortgage application will allow you avoid them from the outset.
In the ever-changing mortgage landscape, getting a home loan can be a difficult process, and these days, banks want everything short of your first-born in order to approve your application.
As well assessing your income, savings history and loan serviceability, lenders are looking for stability and trustworthiness in other areas.
For instance, those that have a varied work history – or worse still, work for themselves – may have a more difficult time being approved for a home loan than those who have been employed in the same job for many years, as banks are assessing every part of your life when making loan approval decisions.
There are many things that can derail your application, so we show you how to avoid them before you get started.
Mistake #1: Carrying large credit card debts
Many people make the mistake of thinking that having a high credit card balance is a positive thing, but it can actually hamper your ability to get a loan. “A lot of us don’t realise how much your credit card limits can impact your borrowing power,” says Helen Collier-Kogtevs from www.realwealthaustralia.com.au. She explains that for every $5,000 you have in credit card limits, you’re actually limiting your borrowing power by up to $25,000. “If you have $20,000 worth of credit card debt, you could be limiting your borrowing power by up to $100,000 – which could make all the difference between you being approved for a home loan or not,” she adds.
Solution: Tally up the total credit limit is across all of your credit cards, including store card, and look for ways to reduce the limits immediately. “Before you consider buying a house, put in place a debt minimisation strategy by first cutting up your credit cards,” says Christie Brock, marketing manager, Police Credit Union. “Next, analyse your spending habits and cancel unused store accounts, interest free cards or line of credits to reduce your debt.”
Mistake #2: Shopping above your price range
Plenty of people get carried away when shopping for a property, particularly would-be homeowners who fall in love with their potential new abode. If you attempt to bite off more than you can financially chew, the bank will decline your application, which doesn’t seem too bad at face value… but if you receive too many “declines” in a short period of time, you could damage your credit file.
Solution: Consult with a reputable mortgage broker or financial institution to work out how much you can comfortably afford to borrow and repay. “Only look at properties that are within your price range, because if you can’t afford the repayments, then your home loan application will be rejected,” says Brock.
Mistake #3: Lack of job stability
Gone are the days when just about anyone could just walk up to a lender and be approved for a 95% home loan. In the post-GFC marketplace, lenders want to be sure that you’re a low-risk prospect, which means they want to be assured of you ability to repay your home loan. This is where job stability comes into the picture, as it demonstrates that you’re a stable prospect.
Solution: If you’re planning to buy a home in the next six to 12 months, don’t go making a sudden career change, and definitely don’t think about throwing in your job to start your own business. “You’ll need steady employment to apply for a home loan,” Brock says, “and you’ll also need to prove that you’ve been in your current position for generally 12 months.”