Applying for a home loan is often a daunting task. Not only do you have to collect the right information and paperwork, there's the anxious wait to hear whether or not your application is successful. There are a few things you can do to make applying for a loan easier on you and boost the chances of a successful application.
Key factors such as income, fixed expenses, the proposed loan and personal loans or credit cards don't include other expenses such as petrol or your weekly supermarket shop. As a general guide, these are likely to be more than 30% to 40% of your before-tax income. So it's worthwhile working out how your income and debt pile up.
Try to reduce your outstanding debts before applying for a loan. If you have several loans, you could even consider consolidating them into a loan that has a lower rate.
Although reducing your outstanding debts is a good way to increase your chances for a successful application, it's also worth noting that it's not only how much you owe that affects your borrowing capacity but how much you can potentially borrow.
This means cancelling credit cards you don't use, or even reducing the credit limits can boost your borrowing power.
A decent deposit also helps when taking out a loan. While some lenders will let you borrow as much as 95% of the purchase price, the bigger your deposit the better. You need at least a 20% deposit to avoid the dreaded lenders mortgage insurance (that you pay but which actually protects the lender if you fail to pay). If you don't have a healthy savings, you can consider avoiding this through family guarantee.
Lenders like knowing that you've been a regular saver. This doesn't have to be in money or investments - even paying down your credit card counts for something.
Get your hands on a copy of your credit file. Your credit history will definitely play a role and it's better to know what the lender will see. Your credit file is available free from www.mycreditfile.com.au or www.dnb.com.au.
Defaults on your credit file doesn't automatically mean you'll be refused a loan. These days, lenders are known to accept a low level of credit defaults.
Lender's like to look at your employment history when assessing a loan application. They like to see employment stability as it helps reassure them that you will be able to commit to your payments later down the track.
If you've changed employment frequently or recently, don't stress out, just be prepared to explain why.
Alternatively you could consider using an experienced mortgage broker to help with the application process. They can help you with the paperwork and have good knowledge of what lenders are after. They can also help give you an idea of just how much you can ask for and tell you if anything on your credit file will have an impact on your borrowing plans.
If you have any doubts or concerns, mortgage advisers can make initial inquiries with some of the lenders they deal with, or those they believe are most likely to be open to your credit history.
It is also important to consider what happens to you and your family if you fall severely ill or became unable to work and struggle to repay your loan.
It is therefore a good idea when taking out a large loan to also consider doing our free financial health to see what other areas of your finances you should get in order when sorting out your loan.
Depending on your results, it will probably be a good idea to put in place a financial plan to protect your family, sort our your will and develop a plan to repay your loan as soon as practical.
Our 5-minute-health-check is accessed from the top right of our web page.