Applying for your first home loan is a little like opening up your underwear drawer to strangers. You can take some of the unpleasantness out of the process by knowing what lenders are looking for.
Lenders use the five C’s of credit when assessing your ability to pay back a mortgage.
1) Credit history. Your lender will want to make sure when you’ve borrowed money, you’ve paid it back. You have to maintain a squeaky clean record if you want your loan approved fast.
2) Capital. Lenders want to ensure you’ve accumulated assets
3) Collateral. This is the property you use as a security. This would mean you’re putting your house up as collateral
4) Capacity. Capacity is your ability to service your debt and it’s measured by your current income against existing debts and the proposed loan repayments. For instance, your housing cost shouldn’t exceed 30% to 35% of your gross income and all of your debts shouldn’t exceed 40% to 45% of your gross income. You can calculate your borrowing capacity by logging on to yourmortgage.com.au/calculator
5) Character. It’s a combination of all four previous C’s as well as subjective and objective assessments such as how long have you been in your job, what type of job you have and how long you have lived in your current residence.
But what can you do to improve your chances of getting approved? These five tips will help you get that final tick of approval:
1) Get preapproved, but understand what type of preapproval your broker/banker is performing
Not all preapprovals are created equal, so it’s important to understand what kind of prequalification you’ve been given. Preapproval can be unconditional- meaning you’ve been given an all clear. Conditional approval means there are some things you need to meet before the lender releases the fund. Getting an unconditional approval is desirable and can be greatly helped by submitting correct paperwork. Use our Mortgage Calcultor to find out how much you can borrow.
2) Bring in all verifiable information
Be sure to bring in a letter that states your income, pay stubs banking information that shows the source of your down payment. Having this information all readily available will provide you with a preapproval with less conditions (some say subject to satisfactory income or down payment verification). Get all that stuff out of the way, so it’s one less thing to worry about.
3) Ask your broker to check your credit history
Not all brokers will do this at the preapproval stage. However, it could prevent you from getting final approval. So if you’re not sure, ask.
4) Build credit history, if you don’t have any
If you’re applying for a mortgage for the first time, you need to be able to show the lender that you have a solid and clean credit history. This means prior to applying, make sure you have a credit card that you’ve been using for some time or personal loans that you’re servicing.
5) Avoid lavish purchases and job changes
Don’t run out and buy cars or expensive items before you buy a home because it will impede the amount you can qualify for. In addition, don’t change your job within six to eight months of buying, because a lender will look at that, but Turner says, depending on the industry you work in, if it’s a natural progression, it will be looked at differently.