Five things you should do before applying for a home loan

If you are thinking about buying a property, you are no doubt aware that lending criteria has recently tightened. And while this has happened for many good reasons, it can make it a little tougher to secure finance.

Getting rejected on a home loan application can have a negative effect on your credit rating and impact how other lenders view your application, so it’s important to get it right first time.

The good news is that there are a few simple things you can do to make yourself a more attractive home loan candidate before you even put pen to paper.

1. Discuss finances with any co-purchasers

If you are buying with someone else, regardless of whether they are a partner, spouse, friend or family member, you must have an honest and detailed discussion about your financial position.

You may think you know your partner’s financial history in detail, but do you really know if they have ever defaulted on a credit card payment or a phone bill? If you have defaults in your history, you need to discuss these with your partner too. You can’t hide a default from a lender, so you should discuss it with your partner at the earliest possible stage to avoid unpleasant surprises later.

A default doesn’t necessarily mean you won’t be able to secure finance, but a lender will take it into account, so it’s best to know what you are working with from the outset. The last thing you want is a default to be uncovered when your application is rejected.

2. Review your credit rating

There are a number of providers, such as Equifax, who will let you review your own credit report for free once a year. Your credit rating will be a number between 0 and 1200, with a higher score being better, indicating that you are a lower risk candidate. Anything above 832 is excellent and less than 510 is below average.

This number will play a big part in how much you can borrow or even if you can secure a mortgage. If you or your partner have a bad credit rating, it’s not all over, you can turn it around, and it’s best to seek financial advice to get you back on track.

3. Reduce or cancel credit cards

Even if you don’t have any outstanding debt on your credit card or other loan facilities, you should cancel them unless they are absolutely necessary. Lenders will treat credit cards and loans as though you are in debt to the maximum amount when considering your application. This is because there is nothing stopping you using this credit after you have received the loan and finding yourself in financial hardship.

4. Put post-pay behind you 

If you are using post-payment services, like AfterPay, it’s best to put these behind you now.  They are essentially small loans, and these providers do generally reserve the right to pull your credit report and report failure to pay on time.  And with one in six Australian customers being overdrawn or overdue on payments on these facilities, it’s becoming a concerning trend.  Regardless of whether you use them responsibly, lenders will look at your spending habits, and post-payment services could well be a red flag.  A good rule for life, in general, is that if you can’t afford something, don’t buy it, and this is even more important when considering a home loan.

5. Talk to the experts

A mortgage broker can be an excellent partner in helping you secure the right loan. They can review your history and help you to determine which lenders and loan types will best suit you. In many cases, they can also discuss your scenario with lenders before you apply and get an indication of whether you will meet criteria. They will ensure you put your best foot forward and guide you through the application process, taking some of the stress out of the process, so you can focus on the more exciting part – finding your home.

A financial planner can also help, particularly if you need assistance with saving your deposit and developing a plan to meet your financial and property goals. It doesn’t have to be about giving up everything you enjoy; a good financial planner can act as a money coach, helping you live for today while planning for tomorrow.

General Advice Disclaimer

The information in this blog is provided by Apt Wealth Partners (AFSL 436121 ABN 49 159 583 847) and is of a general nature only. It may not be relevant to your personal needs, objectives or financial circumstances. The circumstances of each investor are different and you should seek advice from a financial planner who can consider if the strategies and products are right for you.