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How to improve your chances of getting approved for a home loan

Mark Bristow avatar
Mark Bristow
- 7 min read
How to improve your chances of getting approved for a home loan

Unfortunately, many home loan applications are rejected for avoidable reasons, such as  unusually high living expenses, or providing incorrect documentation. Understanding what may lead to your home loan application’s rejection may help you to increase your home loan’s approval chances.

Some of the ways to help get your mortgage application over the line include:

Keep your expenses in check

Lenders often closely scrutinise the income and expenses of each borrower to help determine if they can repay the loan. This is in line with the responsible lending guidelines set by the government.  

In the lead-up to your home loan application, it might be a good idea to watch where your money is going and spend responsibly to help demonstrate your good financial behaviour to a lender. 

Besides following a strict budget, keep an eye out for recurring expenses like gym memberships and buy now pay later (BNPL) services that silently add to your monthly expenses.

Grow your savings

If you’re applying for a home loan, you’ve probably come across the term ‘genuine savings’. These simply refer to when a borrower saves up money over time through budgeting and depositing regularly into a savings account. Non-genuine savings may refer to inheritance and money gifts, tax refunds, sale of assets or shares or equity in a property.

Typically, a home loan lender may want to see proof of ‘genuine savings’ over at least a three-month period when you apply for a mortgage. This helps to demonstrate a level of financial responsibility, as you can budget effectively and display healthy financial habits.

If you’ve inherited your home deposit, for example, and have not saved any money in a separate savings account for the last few months, it may be worth building up some ‘genuine savings’ before you apply.

Building a savings habit could further increase your chances of getting your mortgage application approved. When you take control of your spending, you may find some extra money in your budget. Putting aside these extra dollars can help to build your deposit amount faster, and also show a lender you can manage your money.

Simple changes like swapping bought lunches with packed, home-cooked meals, skipping café-bought coffee and rounding up your purchases could potentially go a long way towards boosting your savings.

Keep your credit score in check

Your credit score is a number used by lenders to gauge how well you’ve been able to manage your finances. If you’ve been making all your repayments on time or keep your credit products to a minimum, you’re likely to have a high credit score.

On the other hand, if you’ve missed or delayed payments, they can stay on your file for a long time, bringing your credit score down. Lenders equate a low credit score with being a high-risk borrower. They often don’t approve home loan applications from borrowers whose credit score is below a specific threshold. Therefore, it’s usually a good idea to check your credit score online before applying for a home loan.

Regularly checking your credit report could also help you get approved for a home loan sooner. By reviewing your credit report before applying for a home loan, you’ll know what’s in it before a lender sees it. This will give you time to correct any errors, such as disputing incorrect listings or working to improve your credit score before you apply. This will in turn improve your chance of getting home loan approval.

If your credit score isn’t where you’d like it to be, consider working to boost it. This may include:

  • Paying off your existing debts (a worthwhile step for any home loan applicants)
  • Automating your repayments so you never miss a bill
  • Consider lowering your credit card limit

Work out how much you can borrow

It’s often helpful to get a fair estimate of how much you can borrow before applying for a mortgage. Your borrowing capacity is the amount a lender will lend to you to purchase a property.

While lenders may use different processes to calculate this amount, there are some common factors that determine your borrowing capacity. These include your income, expenses, number of dependents, and ongoing debts.

You can use a borrowing capacity calculator to get an estimate of the amount you might be able to borrow. This will help you narrow down your property search and help avoid your mortgage application’s possible rejection.

Reduce your debts and credit limits

There are no hard and fast rules for why one lender may reject your application, and another may approve it. But one fairly universal rule is that having outstanding debts or unpaid bills may hurt your chances of approval.

Lenders look at your debt-to-income ratio (DTI) while assessing your home loan application. Your debt-to-income ratio compares the amount of money you earn to the amount of money you owe in existing debt.

If your DTI is over six times your income, many lenders may consider you a risky borrower, though some lenders may have different criteria. This may cause lenders to reject your home loan application, or offer you a higher interest rate than borrowers with a low DTI. On the other hand, if you have a lower DTI, lenders may view this positively, increasing your chances of home loan approval.   

To help keep your debts in check and improve your chance of getting your home loan application approved, you may want to avoid taking on too many loans, keep your credit limit on any credit cards to a minimum, or pay off and cancel your credit cards altogether. This is because lenders often assume a worst-case scenario when assessing whether you can afford a home loan, while also paying interest charges on maxed-out credit card balances.

For example, suppose you have two credit cards with a limit of $3000 each. In this case, many lenders will assume you have a debt of $6000, regardless of how often you actually use your cards or make repayments. Lowering the credit limit on the cards or getting rid of them altogether could help make you a more attractive potential borrower.

You should also be upfront and disclose all the information about any and all your credit cards and other debts while applying for a home loan. Mortgage applications often get declined for non-disclosure of information, and so you may be able to avoid rejection by being honest about your finances.

Avoid any career changes

Having a stable job and income can help you get your home loan application approved. Many lenders are reluctant to lend to people with less than six months of employment history. Additionally, some lenders require you to be in your current job for at least six months or a year before approving your mortgage application.

If you’re planning on applying for a home loan, it may be better to avoid any unnecessary job changes where possible. If you must switch jobs, you may want to discuss your situation with a mortgage broker, who can offer expert advice and may be able to help you find home loan deals from lenders more likely to understand your situation. They can also give you a better understanding of the requirements for mortgage approval from different lenders, and how these may line up with your finances. This may help you filter your choices and increase the chances of getting approved for a home loan.

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Product database updated 16 Jun, 2024

This article was reviewed by Personal Finance Editor Peter Terlato before it was published as part of RateCity's Fact Check process.