Applying for a home loan? Do these 6 things first.
Lenders are looking much more closely at your spending than you might realise.
You've saved the deposit, you've calculated the costs and the dream of your own home is within reach… or so you think.
According to one mortgage broker, many Australians are surprised when they realise how closely the banks are looking at their financial habits.
But even though you've got the deposit, lenders are looking for more than that.
"Having a deposit and feeling confident you can make the repayments is definitely a great start when applying for a mortgage, but it's not the whole picture," said Brett Sutton, mortgage broker at Two Red Shoes.
Lenders will also consider: your credit history, debt-to-income ratio, income stability, savings, living expenses, the property value, regulatory rules and market conditions.
Brett says there are 6 things potential borrowers need to do to get in better shape before they apply:
1. Get rid of high credit card usage (and yes, buy now pay later services)
Using credit services too much or having too high limits can be a red flag for lenders as it indicates financial instability and living beyond one's means.
2. Stop making frequent large purchases
Making large purchases regularly is a sign you're not prioritising saving and not managing your finances responsibly.
3. Cancel those subscription services
If you've got TV streaming services, gym memberships and/or other subscriptions, it all adds up and impacts your overall expenditure.
4. Cut back on dining out and entertainment expenses
Frequent dining out, attending expensive events, and other entertainment expenses can indicate a high-cost lifestyle that affects your ability to save. This includes things like Uber Eats.
5. Rethink those expensive hobbies
If you have a hobby that sees you spending regularly, this also affects your ability to save.
6. Stop gambling
Huge red flag for lenders as it shows high risk financial activity.
To improve your home loan application prospects, Brett recommends reducing discretionary spending, paying down existing debts, building up savings, and demonstrating stable and responsible financial behaviour.
There's no quick-fix
Cancelling all of your subscriptions and cutting down your credit card limit is not necessarily going to get you approved tomorrow. It can take time for some of your financial habits to be deemed as a real change by a lender.
"When it comes to preparing for a home loan application, it's crucial for borrowers to adopt healthy financial habits well in advance," said Brett.
When he says "well in advance", you should be making these changes at least 6 months before you plan to apply.
Why? Well, it can take a few months for your credit score to reflect any changes in spending and credit habits.
It will also help you to accumulate more savings, putting you in a more stable financial position.
And being able to show lenders multiple months of bank statements with responsible spending is going to make you more favourable too. Particularly as they look at your debt-to-income ratio. Reducing any other debts will improve your debt-to-income ratio and doing so over a few months will present an even stronger case.
"As mortgage brokers, we always recommend starting these preparations as early as possible to ensure the best chance of securing a favourable loan," said Brett.
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