How to boost your chances of being approved for a home loan
You’ve finally got that deposit saved, looked into any first home buyer grants available in your state and you’re ready to rock and start searching for the right property. But wait! Firstly you’ll need pre-approval for finance before you can put in any firm offers or turn up at an auction.
Conditions for finance approval have tightened since the Hayne Royal Commission so you need to be well prepared before approaching a lender directly or engaging a mortgage broker. Knowing how lenders assess your application can help boost your chances of approval. Every lender uses four Cs to assess your application. Understanding these will give you the best possible chance of your home loan application being approved.
The Four Cs of Lending
The four Cs you need to consider are:
- Capacity
- Credit
- Collateral
- Current conditions
So let’s take a deeper dive into each of these and the impact they will have on the success or failure of your application for a home loan.
1. Capacity
This is your ability to repay the home loan, consistently and on time each repayment date without hardship. You need to be able to prove to the lender that you can comfortably make the repayments based on your income history. A credit assessor will take into account how you derive your income and what your expenses are, then calculate the surplus available to service the loan you are applying for.
You may not be able to increase your income, but it’s a good idea to look at all your expenses at least six months ahead of applying for finance and look at how you can reduce them. Paying down personal loans and credit card bills will also put you in a stronger position.
2. Credit
The lender’s credit assessor will also look into your borrowing history and how any current loans are being repaid. The analyst will have access to your credit file covering the past five years and look at how responsible (or otherwise) you have been in meeting your repayments.
Before you apply for a loan, it’s therefore a good idea to look at your credit history yourself. All consumers are entitled to obtain their credit file for free from credit reporting bodies, such as Equifax, or Experian. You can apply online and free reports usually take about 10 working days.
If your credit history shows that a creditor has reported you as a credit default, and you still owe money on that debt, you will need to clear the debt and request that the creditor marks the debt as being a paid default. They may or may not comply with your request, but it’s worth asking.
3. Collateral
The security you can offer the lender is known as “collateral”. Collateral can be a term deposit, real estate, shares, even your car and household contents. Each type of collateral is assessed according to how liquid it is as an asset. The easier it would be to sell the asset, the more positive it will be in the eyes of a credit assessor.
4. Current Conditions
This last C is a little more tenuous and is about who you are and where you are in life. The lender’s credit analyst will look into overall factors such as your age, the industry you work in and whether your job will be secure going into the future or impacted by changing economic factors.
All lenders use these four Cs, with some internal variations, to assess loan applications. By learning about how loan applications are assessed, you can adjust your spending and lifestyle so you can present your circumstances to the lender in the best possible light.
Get it right, secure the home loan and you could be out and about searching for a home to buy faster than you thought possible.
