How to Increase Your Approval of a Home Loan for First-Timers

Despite low-interest rates and government grants being the perfect kickstarter for first home buyers, banks have cracked down on their lending criteria making it harder to secure a loan. 

Lenders are also reviewing applications with a higher level of scrutiny. 

If your income is too low, your credit score isn’t good or your employment isn’t stable, there’s a strong chance you’ll be denied. Banks will assess transactions accounts and spending patterns and weigh up whether you’re a responsible lender. Fortunately, it’s still possible to get a slice of the property pie with an educated mindset and winning home loan application. 

Here’s how to make yourself an attractive borrower. 

Be Deposit-Ready

Show lenders you have a good savings history and spending habits, and build a deposit over time. 

Banks and other lenders want proof you can save, even under pressure. Even though you could secure a home loan with a small down payment, larger deposits have less risk for lenders and therefore can work in favour for your application. 

As a general rule of thumb, deposits should be 20-30% of the property’s value. Anything under needs LMI (Lenders Mortgage Insurance) or a guarantor. LMI is a once-off cost that protects the bank if you default on your payments. On the other hand, if you save a larger deposit you’ll reduce the interest on your home loan and monthly repayments. 

Work out how much you’ll need for your deposit here. 

Tip: Put together a plan and start saving early. Many lenders ask for a minimum of 3 months of genuine savings. If you have outstanding debts, arrange plans to pay them off and improve your credit score over time. Set reminders for bills (as any late payments go against your score) and figure out your regular expenses to include in your budget. 

Practice Responsible Lending 

Responsible lending is a process lenders go through to ensure they’re offering quick online loans that are suitable for the borrower and can be repaid. It aims to protect, so you’re less likely to miss mortgage payments or drown in debt. 

The series of checks include anything from spending habits to how organized your financial affairs are and past debts. 

 “Some ways you can prove you’re a responsible lender are:”

• Show a reliable savings history through bank statements and your ability to put money aside regularly 
• Live within your means
• Have a stable job and hold off from any career changes
• If you’re self-employed, demonstrate you’re a safe investment with consistent income and tax statements (most lenders ask for 2 years of tax returns)
• Ensure your bank accounts are in order
• Reduce credit limits 
• Control mindless spending 
• Know what’s in your credit report 
• Pay off and consolidate any debts 
• Don’t apply with more than one lender at a time – while it’s smart to compare multiple lenders and loan terms, submitting too many applications can show up on your credit report and raise red flags 
• Reduce ‘buy now, pay later’ purchases

Educate Yourself on Home Loans

There’s a lot to wrap your head around when buying a home. 

Start by learning the home loan approval process from pre-approval to the purchasing stage. Make an appointment with a home lender specialist or broker, so they can help make sense of any jargon. 

Research loan types and features such as redraw facilities, reduced fees or offset accounts. Different lenders fit different lifestyles and circumstances. If you’re unsure, try online comparison services to easily compare loan features. 

Tip: Look beyond the interest rates and have a clear understanding of your finances and home loan before you choose. 

Budget for Maintenance and Insurance Costs 

Remember, extra costs will increase the amount of money you need to save. There may be maintenance expenses for an established home, mandatory insurance as part of your loan, landscaping or urgent repairs. 

Include these costs when determining affordability. Depending on your financial position, you might be able to apply for a home renovation loan as a buffer or for unexpected costs. These suit renovations under $50,000 where you can borrow from $2,000. 

Get Your Documents in Order

Applying for pre-approval involves a lot of paperwork. But it’s the best way to assess your financial position and find the right options. 

Pre-approval maximises your chance of approval and ensures you’re ready. Have all your documents in order, which will help the process run smoother and show the lender you’re serious about buying. 

You’ll need:

• Photo ID
• Income details including recent payslips and any other income like government benefits
• Asset details such as superannuation, savings accounts, vehicles and investments
• Liabilities including credit cards and other loans
• Additional expenses like rent payments, living costs etc
• Recent tax returns 
• Proof of deposit savings
• Recent bank statements for all accounts including credit cards
• Business statement, if you run your own business 

Tip: Pre-approvals have an enquiry date. Be aware you’ll only have 3-6 months and speak to your lender and/or broker about what to expect when it expires. Depending on how much time has passed, it may be as simple as resubmitting a recent payslip or require a full resubmit if circumstances have changed. 

Applying for a home loan doesn’t have to be scary or stressful for first-timers. With these tips and a strong application, you could be on your way to owning your home. 

Author Bio

This article is written by Jayde Walker – a Perth Copywriter who writes for the home improvement and real estate industries. Catch her on LinkedIn.