The essentials: What to do and what to avoid when applying for your home loan

Whether you’re buying your first, second or third home, or an investment property, it’s no secret that getting a home loan has become more challenging recently.

In the past 12 months lenders have started taking a closer look at borrowers’ finances, with the royal commission and changing regulations prompting banks to crack down on irresponsible lending.

“The banks are being a lot tougher,” Canstar group executive of financial services Stephen Mickenbecker says. “They’re looking at your actual expenses and not some formulaic average of what it costs to live.”

While this may mean some buyers won’t be able to borrow as much as they could have at the peak of the market, it’s unlikely that most applicants will be rejected entirely.

“Banks want to lend money,” Anna Porter, founder of wealth advisory Suburbanite says. “They don’t make money unless they lend it. They are going to look for ways to lend money without breaking policies or laws.”

Knowing what lenders look for when approving a loan, as well as the red flags that will raise questions, is the key to successful borrowing.

Being prepared

Borrowers should tidy up their finances well in advance of a property purchase to paint the best possible picture to lenders and streamline the process.

Mickenbecker says those who are refinancing will find it easiest, as their ability to meet repayments is self-evident.

“If you’re a first-home buyer, you don’t have that proof point,” Mickenbecker says. “You’ve got to more or less replicate that credit history.”

Mickenbecker says new buyers should put aside, as a minimum, the difference between their current rent and estimated repayments to prove they could afford to repay the loan.

“You’re showing this great discipline, that you’re already doing what is required to pay the loan,” he says.

Mortgage broker and Wealthful founder Chris Bates says limiting discretionary spending not only makes a borrower more attractive
in the lender’s eyes, but also gives a healthy boost to buyers’ deposits.

“You’ve got to live like you’ve got that loan today,” he says. “It’s good practice to actually make some cutbacks for three to six months, get comfortable with that, and then apply for a loan.”

Banks generally take the closest look at the past three months of activity when assessing an application, meaning any spending during that period will be under the microscope.

Bates says increased scrutiny is expected to become the norm among mainstream banks, and it’s a mistake for borrowers to limit themselves to the least-thorough lenders.

“If the best deal on the market is a lender who is looking at things in a lot more detail, you want to be able to use them,” he says.

Red flags

Borrowers should always ensure they can meet the obligations of a home loan well into the future but, prior to applying for a loan, it’s best to minimise behaviours that could be considered warning signs of a risky borrower.

“Any behaviour that makes them think that you have a problem with spending is going to be a behaviour that they don’t like,” Mickenbecker says.

Lenders look at both the level of spending as well as the makeup. Contactless payment, streaming services and online food delivery might make spending easier, but Mickenbecker says these are less concerning to lenders than addictive behaviours.

“Bankers are realistic,” he says. “Alcohol, smoking and gambling would be far more worrying to a banker than Uber Eats.”

Over-reliance on credit is a key red flag. Banks look at the credit limit rather than the balance, and borrowers with multiple credit cards will be assessed as if all their accounts were maxed out. The combined minimum monthly repayments is considered an ongoing expense.

“It looks really good on an application to have no credit cards,” Bates says. “But if you have a credit card, ideally have just one and a small limit on it.”

Bates says a credit assessor’s first impression of an applicant has a big effect on their likelihood of being approved, and unusual or large purchases, gaps in employment and even minor credit issues like a default on a phone bill should be accompanied by an explanation.

“You’ve got to understand the things that a credit assessor might have concerns about and address them in the cover letter of your application,” Bates says.