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

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

A major part of the home buying process is getting a suitable and competitive home loan. Unfortunately, a large percentage of home loan applications are often rejected for avoidable reasons.

For instance, unusually high living expenses or providing incorrect documentation may cause your mortgage application to be rejected but can be avoided in some cases.

Understanding what may cause your home loan application’s rejection and how to avoid these things can significantly improve your home loan approval chances. Here’s a list of ways you can help get your mortgage application over the line.

  • Keep your expenses in check

In recent times, lenders have introduced additional changes to the home loan application process, including closer scrutiny of borrowers’ income and expenses to determine their ability to repay the loan.

Many lenders are scrutinising borrowers’ expenses to meet the responsible lending guidelines set by the government. Therefore, it might be a good idea to watch where your money is going and spend responsibly to help demonstrate to a lender good financial behaviour. Besides following a strict budget, keep an eye out for recurring expenses like gym memberships and buy now pay later services that silently add to your monthly expenses.

Building a savings habit will 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. You can put aside these extra dollars to build your deposit amount faster. It will also illustrate to a lender you can manage your money.

Simple changes like swapping bought lunches with packed, home-cooked meals, skipping cafe bought coffee and rounding up your purchases can go a long way in 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 can also help you in getting approved for a home loan faster. 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 report and credit score before a lender sees it. This will in turn improve your chance of getting home loan approval.

  • Work out how much you can borrow

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

Lenders look at something called 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. A DTI that is over six times your income is considered risky by many lenders.

It may cause them 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 debt to income ratio, lenders may view this positively, increasing your chances of home loan approval.  

This shows that you have a better chance of getting your home loan application approved by keeping your debts in check. To do this, you need to make sure you don’t take on too many loans and keep your credit limit on any credit cards to a minimum or even pay off the cards.

For example, suppose you have two credit cards with a limit of $3,000 each. In this case, many lenders will assume you have a debt of $6,000, irrespective of whether you use your cards or make your repayments regularly. So lowering the credit limit on the cards or getting rid of them would 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 you can avoid rejection for this reason by being honest about your finances.

  • Avoid any career changes

Having a stable job and income can help you in getting your home loan application approved. Many lenders are reluctant to lend to people who’ve worked for less than six months. Additionally, some lenders require you to be in your current position for at least six months or a year before approving your mortgage application.

If you’re planning on applying for a home loan, it’s better to avoid any job changes unless necessary or inevitable. If you have to switch jobs, you may want to discuss your situation with a mortgage broker. A broker can help you with home loan deals from lenders more likely to understand your situation and offer expert advice. They can also give you a better understanding of your finances in terms of lenders’ requirements for mortgage approval. This will help you filter your choices and increase the chances of getting approved for a home loan.

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Fact Checked -

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

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Learn more about home loans

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

What is the ME bank home loan approval time?

To start the process of getting a loan with ME bank, you can fill out the online application form. You’ll have to provide information about your income details, assets and liabilities, and the property you want to buy.

Generally, the pre-approval of your loan application can happen within four hours, and in some instances, it may take up to two weeks. It’s important to remember this is only conditional approval.

If you make an offer and the seller accepts it, you’ll need to wait for the cooling-off period, which varies from two to five days depending on where you live. After that, it can take between six and eight weeks after contracts have been exchanged for your application for unconditional approval to be processed.

What are the benefits of a reverse mortgage from P&B Bank?

A reverse mortgage allows senior homeowners to unlock the equity in their homes. There is no repayment schedule, and the loan is repaid at the time of selling, if you move out or when the homeowner passes away. The interest accumulates on the outstanding amount and is added to what was initially borrowed.

Here are some benefits of applying for a P&B Bank reverse mortgage:

  • Flexibility to use the funds as desired; you can travel, pay for medical bills or undertake home improvements or use it for your regular living costs
  • A negative equity guarantee ensures the amount you have to repay never exceeds the value of your home
  • A reverse mortgage does not have a regular monthly instalment, and you can repay any amount you wish at any point during the loan tenure
  • You can choose to withdraw the loan amount as per your requirements

The P&B Bank reverse mortgage amount is based on factors like your age, location of the property, and the loan-to-value ratio (LVR).

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

What is the ANZ home loan settlement process?

Settlement is the procedure for the official transfer of ownership between the seller and buyer. It’s often done without the seller or buyers input but between both parties’ the financial and legal representatives.

Here is how the ANZ home loan settlement process works:

  1. The solicitor or conveyancer prepares the Transfer of Land document at least two weeks before the settlement date.
  2. The signed document is registered at the state or territory land registry office.
  3. Your solicitor or conveyancer will connect with the ANZ home loan settlement contact and the seller’s solicitor or conveyancer to finalise the date, time, and place of settlement.
  4. You must deposit any applicable amount into your ANZ account three days before the settlement date.
  5. After the settlement is completed, your solicitor or conveyancer will send you a Statement of Adjustment confirming the disbursal of funds from your home loan amongst the involved parties.

How does ANZ calculate early repayment costs?

If you have a fixed interest home loan, you’ll pay ANZ home loan early exit fees for partial or full repayment of the loan amount before the end of the fixed interest rate duration. These fees are also payable if you switch to another variable or fixed-rate loan.

The ANZ mortgage early exit fees can vary and you can get an estimate from the lender before you decide to prepay the loan. However, the exact early repayment cost can be determined when you prepay the loan.

The early exit fees are calculated after considering factors like the prepayment amount, the period left before the fixed-rate duration ends, and the change in the market rates since the beginning of the fixed-rate period. The early exit fees may not be charged if you’re paying off a smaller amount. You can check with ANZ to see how much you’ll have to pay.

Is a second mortgage tax deductible?

If you take out a loan to invest in a property, you can claim a tax deduction on the interest you pay as long as the property is earning income. In other words, if you rent the property for the entire year, you can claim a tax deduction for 12 months of interest payments. But, if you use the home for six months and rent it for the other six months, you can claim deduction only for 50 per cent of the interest amount.

You also get tax benefits for items that lose value over the years. But, the entire amount is not allowed as a tax deduction in the same year; instead you’ll have to claim a portion each year over a number of years. 

Additional borrowing costs, such as maintenance fees, stamp duty, offset account setting up fees, Lenders Mortgage Insurance (LMI), and establishment fees, can also be claimed as tax deductions.

Before you claim second mortgage tax deductions, it’s often worth checking with an experienced tax expert.

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase. 

Can I get a home renovation loan with bad credit?

If you're looking for funds to pay for repairs or renovations to your home, but you have a low credit score, you need to carefully consider your options. If you already have a mortgage, a good starting point is to check whether you can redraw money from that. You could also consider applying for a new home loan. 

Before taking out a new loan, it’s good to note that lenders are likely to charge higher interest rates on home repair loans for bad credit customers. Alternatively, they may be willing to lend you a smaller amount than a standard loan. You may also face some challenges with getting your home renovation loan application approved. If you do run into trouble, you can speak to your lender and ask whether they would be willing to approve your application if you have a guarantor or co-signer. You should also explain the reasons behind your bad credit rating and the steps that you’re taking to improve it. 

Consulting a financial advisor or mortgage broker can help you understand your options and make the right choice.

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

How long does ANZ take to approve a home loan?

The process of applying for a home loan usually stays the same across all lenders. On the other hand, the time it takes for a lender to approve the home loan differs from lender to lender. When it comes to ANZ, it takes anywhere between 15 to 18 business days to approve a home loan from the day of the application to approval. This timeframe is highly dependent on the credibility and availability of your documentation. You can apply for an ANZ home loan in two ways; a Quick Start home loan application or a full online application.

If you opt for the Quick Start home loan option, you’ll need to fill out a form with basic details. During this stage, you don’t need to add any supporting information. An ANZ representative will then call you within 48 hours. The representative will help take your application forward, including assessing all relevant information, documentation and conducting a credit check.

You can also submit your entire home loan application with ANZ online by filling out a comprehensive form with all the information and documentation needed.

Once ANZ has conducted the preliminary checks, you’ll be informed of the pre-approved amount they’re willing to offer. Based on this amount, you can set a budget for your property search and make sure you stay inside your budget. Pre-approval will last for three months but can be extended by applying with ANZ if you don’t find a property. But it’s best to find a property as soon as possible as ANZ may decide to change the amount if your financial situation changes.

After you find a property and have your offer accepted, ANZ may send an assessor to the property to verify it’s value. If everything is per their terms and conditions, ANZ will finalise your home loan’s approval and release the funds.