5 factors affecting your home loan application
When it comes to getting a property loan, it’s not just how much you earn that counts.
So, you’ve decided it’s time to buy a home or investment property. At the same time as you’re doing your research about the local market and attending auctions and inspections, you need to prepare to apply for a home loan.
We say ‘prepare’ because before you even think about shopping around for a loan, lender or broker, you need to get your finances into shape. There are two reasons for this.
First, lenders use a ‘snapshot’ approach to assess your suitability for a loan. In other words, they base their assessment on your financial situation as presented in your loan application. They’re not interested in what you’re ‘going’ to do to improve your finances — that would merely be speculation. They want to know whether you currently have cash or equity to contribute, and whether you’re capable of repaying the loan.
Second, lenders also want to form an opinion how much risk you pose to them. If they consider you a high risk borrower for some reason, they may charge you a higher interest rate or fees, or perhaps knock you back for a loan altogether.
5 homeloan factors to know about
Here are the key factors that may limit your ability to get your desired loan, and what you can do about them. In most cases it’s sensible to delay applying for a loan until you sort them out, because your chances of being approved will be much higher.
1. Savings history
Lenders want to see evidence of at least six months’ regular savings. This is particularly important for first homebuyers, who don’t have equity from another property to put towards the purchase. Evidence of a regular savings habit will show the lender that you have the ability and discipline to put away money regularly, which is what you’ll have to do when you get a mortgage.
2. Past loans
Lenders want to know whether you’ve successfully paid back any past loans. If you’ve taken out a loan and haven’t met the repayments, the chances are that your name will show up when the lender conducts a credit check. So don’t try to hide it. It’s far better to tell the lender in writing what happened, why it happened and what you did to rectify it; then submit the letter along with your loan application.
3. Current loans
If you have any current loans, such as a personal loan or car loan, the lender will want to see your recent repayment history as evidence that you’ve been able to pay back what you owe. If you can’t manage your existing commitments, they’re not likely to lend you more money.
4. Credit card limits
When assessing how much you can borrow, lenders take existing debts into account. When it comes to credit cards, however, they don’t just take the current balance into account, but the entire limit on the card. So even if you only have a debt of $500 on a credit card with a $2000 limit, the lender will use the higher figure. What’s more, this reduces your borrowing capacity by many times the limit amount. So if you have a card with a high limit that you don’t really need, it might be worth getting the limit reduced before you apply for your home loan.
5. Probationary employment
If you’ve just started a job and you’re still in the probation period, lenders are less likely to consider you a good risk because there’s no evidence that you’ll have an ongoing capacity to pay back the loan. In this case, it’s best to wait till you’re permanently employed until applying for a loan. You can use the time to your advantage by researching the property market in your desired area.
Once you’ve whipped your finances into shape, you can choose a lender or broker and submit an application for pre-approval of your desired home loan, along with the required supporting documents. A pre-approval lets you know in advance how much you can spend on a property. This is particularly handy if you’re going to be bidding at an auction, when the purchase is unconditional. A pre-approval is usually valid for three to 12 months, depending on the lender.
TIP BOX
- Lenders take a ‘snapshot’ of your finances at the time you apply for a loan, so get them into shape beforehand.
- If you’ve had problems meeting repayments on past or current loans, be upfront about it.
- Credit card limits can affect your borrowing capacity, so consider reducing them before you apply for a home loan.
NB: All advice is general, and for guidance only. It is advised to seek professional financial advice, tailored to your personal situation before making any decisions.
