Tips to Help You Get Approved: Navigating Home Loan Applications

Securing a home loan can be a complex and sometimes daunting process, especially for first-time buyers or those with unique financial situations. Whether you’re wondering how much deposit you need, how to improve your chances of getting approved, or if you can still get a home loan with a bad credit score, understanding the requirements and options available is crucial. This guide provides valuable insights and practical tips to help you get approved. By following these recommendations, you can enhance your financial profile, meet lender criteria, and improve your chances of getting your home loan approved. Read on to discover the essential strategies for achieving your homeownership goals.

Q. How much deposit do I need? (can I get a home loan without a 20% deposit)

A. The deposit required for a home loan in Australia typically ranges from 5% to 20% of the property’s purchase price. While a 20% deposit is ideal as it allows you to avoid paying Lenders Mortgage Insurance (LMI) and secure better loan terms, it is possible to obtain a home loan with a deposit as low as 5%. 

Less than 10% Deposit: 

• Lenders Mortgage Insurance (LMI): If your deposit is less than 20%, you will likely need to pay LMI, which protects the lender if you default on the loan. The cost of LMI can be substantial, depending on the size of your loan and the deposit amount. 

• Government Schemes: Programs like the First Home Guarantee (FHG) allow eligible first home buyers to purchase a property with as little as a 5% deposit without paying LMI. The government guarantees up to 15% of the loan, making it easier to secure financing. 

• Higher Interest Rates: Loans with lower deposits might come with higher interest rates and stricter lending criteria. 

• Additional Costs: Be prepared for higher upfront costs and potentially stricter eligibility requirements. 

Securing a Home Loan with a Smaller Deposit: 

• Savings and Financial Stability: Lenders will assess your ability to manage mortgage repayments, considering your income, expenses, and credit history. 

• First Home Owner Grant (FHOG): Depending on your state or territory, you might be eligible for grants that can help boost your deposit savings. 

• Parental Guarantee: Some lenders offer family guarantee loans where a parent or family member uses their home equity as additional security. This allows the purchaser to avoid LMI, access lower rates than otherwise and also have more flexible eligibility requirements. 

Conclusion: 

While a 20% deposit is an often talked about threshold, you can secure a home loan with a smaller deposit through various means. It’s important to understand the implications of a lower deposit, including the potential for higher costs and stricter loan conditions. Consulting with a mortgage broker or financial advisor can help you navigate your options and find the best solution for your situation. 

Q. How do I improve my chances of getting a home loan approved?

A. Improving your chances of getting a home loan approved involves demonstrating to lenders that you are a reliable and low-risk borrower. Here are some key steps to enhance your loan approval prospects: 

1. Improve Your Credit Score:

• Check Your Credit Report: Obtain a copy of your credit report and ensure it is accurate. Correct any errors that may negatively impact your score. 

• Reduce Commitments: You can improve your credit score via a combination of reduce your existing debts, such as credit card balances and personal loans, as well as cancelling or reducing your facility limits. 

• Make Timely Payments: Consistently pay your bills and loan repayments on time to build a positive credit history. 

• Minimise the amount of credit you apply for: Lots of credit applications results in a lower credit score. So, if you like getting credit cards for the frequent flyer points beware it is lowering your credit score 

If you have a strong credit score then you may not need to look to worry about this. A good mortgage broker can help you understand where you are at and what (if any) action is needed.  

2. Save a Larger Deposit:

• Aim for 20%: While you can get a loan with a smaller deposit, having a 20% deposit reduces the need for Lenders Mortgage Insurance (LMI) and improves your loan terms. 

• Demonstrate Savings Discipline: Show lenders that you have a history of saving regularly, indicating financial responsibility. 

3. Reduce Financial Commitments:

• Minimise Liabilities: Lower your ongoing financial commitments, such as credit card limits or clearing car loans, HECS debts or other debt repayments, will improve your borrowing capacity (paying down loans without paying them off will not help). 

• Avoid New Debts: Refrain from taking on new loans or credit in the months leading up to your home loan application. 

4. Stable Employment and Income:

• Maintain Consistent Employment: Lenders prefer applicants with stable employment history, ideally in the same job for at least six to twelve months. 

• Provide Proof of Income: Be ready to furnish payslips, tax returns, and bank statements to verify your income. 

5. Prepare Necessary Documentation:

• Organise Financial Documents: Gather essential documents, including identification, proof of income, savings statements, and details of existing debts. 

• Complete Application Accurately: Ensure all information in your loan application is accurate and complete to avoid delays or rejection. 

6. Manage Your Expenses:

• Create a Budget: Track your expenses and create a budget to show lenders that you can manage your finances effectively. 

• Cut Unnecessary Spending: Reduce discretionary spending to increase your savings and demonstrate financial prudence. 

7. Seek Professional Advice:

• Consult a Mortgage Broker: A mortgage broker can help you understand the loan market, identify suitable lenders, and navigate the application process. 

• Get Pre-Approval: Applying for a pre-approved loan gives you an idea of how much you can borrow and demonstrates to sellers that you are a serious buyer. 

By taking these steps, you can improve your financial profile and increase your chances of securing a home loan. Being prepared and presenting yourself as a low-risk borrower will make lenders more likely to approve your application. 

Q. I have just started a new job, do i have to wait till I am off probation to get a home loan?

A. Starting a new job can raise questions about your eligibility for a home loan, especially if you are still on probation. While it is generally preferable to be off probation, it is not necessarily a barrier to securing a home loan. Here are some factors to consider: 

1. Lender Policies:

• Varied Criteria: Different lenders have different policies regarding employment probation. Some may require you to be off probation, while others might be more flexible. 

• Industry and Role: Lenders may be more lenient if you are in a stable industry or one where there is alway demand for workers (eg nursing). 

• Work History: Continuous employment in a field over 2+ years helps lenders look past the fact that a you have just started a new job. 

2. Financial Stability:

• Strong Financial Position: Demonstrating a solid financial position, including a good credit score, a substantial deposit, and a history of saving, can improve your chances. 

• Previous Employment: If you have a stable employment history and moved to a new job in the same industry, lenders may view your application more favorably. 

3. Employment Terms:

• Permanent vs. Contract: Being in a permanent full-time position is generally viewed more favorably than contract or temporary roles. As more and more jobs move to contract roles, banks are adjusting their policies accordingly. Note that if your employer or employment agency is taking out tax from your income then using income from this type of contract is easier than when you are responsible for paying tax yourself (considered as self-employed). 

• Income Verification: Providing payslips and a letter from your employer confirming your employment status can help support your application. 

4. Mortgage Broker Assistance:

• Professional Advice: Consulting a mortgage broker can be beneficial. Brokers have access to a wide range of lenders and can identify those more likely to approve a loan for someone on probation. 

• Tailored Solutions: A broker can help present your financial situation in the best light, increasing your chances of approval. 

5. Alternative Solutions:

• Guarantor Loans: Having a family member act as a guarantor can strengthen your application by reducing the perceived risk to the lender. 

• Higher Deposit: Offering a higher deposit can mitigate the lender’s risk, making them more likely to approve your loan despite your probationary status. 

Conclusion: 

While being off probation is ideal, it is not an absolute requirement for getting a home loan. Lenders consider various factors, and demonstrating financial stability and strong employment prospects can improve your chances. Working with a mortgage broker can provide valuable guidance and access to lenders who are more accommodating to your situation. 

 

Q. Can I get a home loan with a bad credit score? 

A. Obtaining a home loan with a bad credit score can be challenging, but it is not impossible. Here are some steps and considerations to improve your chances: 

1. Understand Your Credit Situation:

• Check Your Credit Report: Obtain a copy of your credit report to understand the extent of your credit issues. Look for any errors and dispute them if necessary. 

• Know Your Score: Knowing your exact credit score helps in understanding which lenders might be willing to work with you. 

2. Improve Your Financial Profile:

• Pay Down Debts: Reducing your existing debt can improve your credit score and demonstrate financial responsibility. 

• Save a Larger Deposit: A larger deposit reduces the lender’s risk and may compensate for a lower credit score. 

• Stable Employment: Having a steady job and consistent income can positively impact your application. 

3. Consider Specialist Lenders:

• Non-Bank Lenders: Some non-bank lenders and specialist lenders cater to borrowers with bad credit. They might offer loans with higher interest rates or more stringent terms. 

• Subprime Lenders: These lenders specialise in high-risk borrowers but often come with higher fees and interest rates. 

4. Demonstrate Improved Financial Behavior:

• Show Stability: Lenders will look more favorably on recent financial stability. Avoid missed payments and demonstrate a consistent effort to manage your finances better. 

• Provide Explanations: If your bad credit is due to specific circumstances, such as a medical emergency or temporary job loss, provide documentation and explanations to the lender. 

5. Seek Professional Help:

• Mortgage Brokers: A mortgage broker can help you find lenders that are more likely to approve your application despite your credit history. They can also provide advice on improving your credit and financial standing. 

• Credit Repair Services: Consider working with a credit repair service to address and potentially improve your credit score. 

6. Be Prepared for Higher Costs:

• Higher Interest Rates: Expect higher interest rates due to the increased risk you represent to lenders.  

• Lender’s Mortgage Insurance (LMI): You may need to pay LMI if your deposit is less than 20%, which adds to the overall cost. 

• Loan Risk Fee: With non-prime lending (such as where you have a poor credit score) is involved lenders may charge an upfront risk fee in addition to higher rates. 

Conclusion: 

While a bad credit score can limit your home loan options, it doesn’t necessarily disqualify you. Improving your financial profile, exploring specialist lenders, and seeking professional advice can enhance your chances of securing a home loan. Be prepared for potentially higher costs and ensure you can manage the repayments to avoid further financial strain. 

Navigating the home loan landscape in Australia may seem challenging, but with the right knowledge and preparation, you can significantly improve your chances of success. From understanding deposit requirements and enhancing your credit score to managing your finances and exploring various lender options, each step you take brings you closer to your homeownership dreams. Remember, demonstrating financial stability, providing accurate documentation, and seeking professional advice are key strategies to bolster your application. By following these tips to help you get approved, you can confidently approach lenders and secure the best possible terms for your home loan. Armed with these insights, you’re well-equipped to make informed decisions and embark on a successful home loan journey.