Effective tips for a successful home loan application

So, you've decided to enter the market, move to a new home, or purchase an investment property. Congratulations! Buying property is exciting and often rewarding. 

However, it typically means taking out a home loan, which leads us to one of the most important steps of trading real estate - applying for a mortgage.

With so many lenders and options available, the home loan application process can seem daunting. But I'll let you in on a little secret: Lenders want to hand out home loans, and if you meet a lender's eligibility criteria and submit a strong application, your chances of securing a competitive mortgage are likely high.

"There're so many tips and tricks out there, but keeping it simple is really important," Icon Mortgages managing director Jas Makkar told Your Mortgage.

"In order to get a loan, you need to keep your expenses clean, not take on unnecessary debt, [and] be well prepared for a loan application."

With that in mind, let's go through the steps of creating a home loan application that puts you in the best position to get the tick of approval.

Tip #1: Check your home loan eligibility

Not to be Captain Obvious, but the first step to achieving mortgage approval is to ensure you're only applying for products you're eligible for.

Most Australian lenders have a few basic requirements that borrowers must meet, such as:

• Must be at least 18 years old.

• Must be an Australian citizen or permanent resident, or

• In a de facto relationship or married to an Australian citizen or permanent resident

And don't simply consider your finances - the location, size, and condition of the property you wish to purchase may play a role too. If you're buying a studio apartment, acreage, or outside of a capital city or regional centre, make sure the lender you apply to will accept the property as security.

Additionally, many lenders offer specific products for specific borrowers, like home loans for:

• First home buyers

• Owner-occupiers

• Refinancers

• Investors, and

• Those purchasing property through a Self-Managed Super Fund (SMSF)

These categories often overlap (for instance, a first home buyer or someone looking to refinance their mortgage will likely be eligible for an owner-occupier home loan), but might offer different criteria for different borrowers.

As a side note, consider if there are special offers for you based on where you are in your property journey. For example, many lenders offer discounted rates or extra features to first home buyers, or they might provide cashback to mortgage refinancers. It's always worth weighing up all your options - and doing so could save you a significant chunk of change.

Tip #2: Keep your finances tidy

You know the saying: 'Failing to plan is planning to fail. Take the time to take a bird's eye view of your financial position, as a lender no doubt will once you gear up to enter the market.

Audit your financial position

Take stock of your income, expenses, existing debts, and savings - particularly how they've grown, shrunk, or changed over the past few months. But don't stress over every coffee purchase.

"You don't need to change your way of living," Mr Makkar said.

"Many people start trying to live a different way [in preparation for a home loan application] but what's going to happen is, the moment they get the loan, they're going to go back to their old spending habits."

It's better to get a mortgage you know you can afford than to temporarily scrimp and later find yourself falling behind.

If you're self-employed or a contractor and don't have a tonne of documentation to verify your income, you might look into a low doc home loan option.

Check your credit score

It's free and easy to check your credit score every three months, and doing so could bring potential red flags to light.

"In a recent application, everything looked good but they were having issues getting financed," Mr Makkar said.

"The reason was their credit score was very low, and the reason their credit score was very low despite them being in a good financial position was they were taking on a lot of unsecured debt."

While many would-be borrowers like to hold onto their cash in case of emergencies, relying on debt products for purchases can cause trouble.

Consider reducing or eliminating consumer debt

On that note, if you have credit cards, buy now, pay later (BNPL) accounts, or personal loans, consider reducing their limits or paying them off now.

Your lender will consider your outstanding and accessible debt (including your BNPL or credit card limits) when assessing your borrowing power, and consumer debt can have a greater impact than one might think.

Scrub your bank statements for red flags

And, if you notice any substantial ins or outs in your bank statements, expect your lender to take note of them too.

Now could be a great time to cancel unused subscriptions and tell your mates to stop leaving rude words in bank transfer references.

Tip #3: Get mortgage pre-approval first

Concerned or anxious about applying for a home loan? Why not get pre-approved first?

Not to be confused with unconditional home loan approval, pre-approval sees a lender look over your finances and agree that, in principle, it would offer you a mortgage.

It doesn't factor in the property you're purchasing or any changes to your financial position that occur between when you're pre-approved and when you put in a formal application. However, it does give you a good indication of whether you're eligible for a home loan and how much you might be able to borrow.

A word of caution: Some lenders don't thoroughly consider a pre-approval application, and some banks' systems generate pre-approvals automatically. This could give borrowers a false sense of security, Mr Makkar said.

"When people work with mortgage brokers, we know which lenders fully assess their pre-approvals as if it was a full application.

"So, especially for buyers who will be heavily relying on finance, you should choose lenders [that] fully assess their application, leaving less room for a surprise two months later when you find a property."

There are just two notable downsides to getting home loan pre-approval:

• Your lender will run a credit check, which will leave a small, temporary mark on your credit report

• Pre-approval generally has an expiration date, typically around three months

Tip #4: Have all the needed documentation at hand

Whether you're applying for a home loan through a broker, a bank branch, or at home in the comfort of your living room, it's important to provide all the information your lender needs to assess your application. Failing to do so can stall the process or cause your application to be thrown out on a misunderstanding.

You'll likely need to provide proof of:

• Your identity, with documents like your

  • Passport

  • Driver's licence

  • Medicare card

  • Documentation with your name and address on it, such as an electricity bill

• Your income and deposit, with documents like

  • Bank statements

  • Recent payslips

  • ATO Notice of Assessment

  • Letter from your accountant

• Your expenses, with documents like

  • Bank statements

  • Details of existing loans or credit cards

  • Any other relevant documents

• Documentation regarding the property you're buying, such as

  • Contract of sale

  • It's location and square meterage (some lenders are selective about the property used as security)

  • Details of your solicitor or conveyancer

• Other information related to your application, like

  • Documentation on guarantors

  • Documentation related to gifted deposits

  • Whether you plan to use a first home buyer grant or the Home Guarantee Scheme

  • Anything else that could be of significance to your application

Bonus tip: Take your time when filling out a home loan application

Just like not having all the information you need to provide your home loan lender can slow down or disrupt your application, so too can filling it out incorrectly.

It's easy to miss a decimal point here or an extra zero there - and doing so could put your mortgage approval at risk.

Tip #5: Don't apply for mortgages with multiple lenders at once

The final tip to putting in a successful mortgage application is to only submit one at a time.

Each time you apply for a home loan, that lender will run a check on your credit, which will be recorded in your credit report. Multiple enquiries in a short space of time can be a major red flag, as it suggests you might have been rejected multiple times over.

That's why it's so important to identify the most competitive home loan you're eligible for early on and apply for it. If you're in the market for a low-rate mortgage deal, check out some of the market's best:

Important Information and Comparison Rate Warning

What's left to do but wait to receive home loan approval

After following all the steps above, you're likely feeling confident your home loan application will be approved. After all, if you have a secure income, a deposit or guarantor, and the ability to service a mortgage, why wouldn't the bank say yes? And, if what you say is true, it probably will.

If it does, congratulations! You're well on the way to owning your new abode.

But, there remains a chance that you mightn't get the answer you want. In which case, you might reach out to the lender to ask why or an independent expert for help. It could be that a computer glitch or human error is behind it or there might be something you've missed or failed to correctly explain.

If the answer is a hard no, it's probably worthwhile digging into the reasons behind the rejection so you can polish up your next application or go down the low doc (short for low documentation) home loan route instead.

Mr Makkar recommends reaching out to a mortgage advisor or broker to work out why you weren't successful.

"Let them review what happened and understand why your application was declined and if the reasons can be mitigated," he said.

"Most of the time they can be and if there's one lender that you don't meet the criteria of, there'll be another that you do."

_{Article originally written by Emma Duffy, last updated by Brooke Cooper.}

_{Image by Brooke Cagle on Unsplash}