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In order to be approved for a home loan, you only need to do one thing: convince the lender that he has the ability to repay the loan. However, the only difficulty here seems to be that lenders are not so easily convinced! Different mortgage lenders and banks have different sets of criteria, ranging from the age, income, occupation of the applicant to their credit rating and credit history. It should also be mentioned that the requirements for residential mortgage loans have become stricter over the years.
However, it is not necessary to press the panic button at this point. As long as you pull yourself together and do the right things, getting approved for a home loan shouldn’t be difficult. Carefully read and follow the tips below as best you can and it will not only dramatically improve your chances of getting approved for a home loan, but will also help you get an easier interest rate on your mortgage. In addition, or as an alternative, you can also seek the services of a reputable mortgage counseling service before submitting a mortgage application. For our Australian audience, we recommend My Home Loan Rates, a home loan consultancy with an excellent track record. In addition to advisory services, the company also offers online tools for comparing mortgage and interest rates from different lenders and calculating repayments over the life of a loan.
5 Ways to Increase Your Chances of Getting a Mortgage Approved
1. Present a clean and stable financial balance sheet
This will help you convince the lender that you have the ability to repay the loan which, as already mentioned, is the ultimate factor when determining the strength of a home loan application. First, once you file an application, be sure to disclose everything about your current and future financial health. We are therefore talking about savings, investments, sources of income as well as your current debts and other financial obligations. Based on this information, lenders will assess the impact of monthly mortgage repayments on your financial momentum.
We strongly recommend that you first take stock of your outstanding debts before submitting a mortgage application. Try to settle as many as possible before starting the application process. One of the important metrics that lenders use when evaluating home loan applications is the applicant’s debt-to-income ratio. A lower ratio will naturally increase your chances of getting loan approval.
So be sure to stay up to date with things like car loan fees, credit card bills, and other debts. Also, avoid taking out large (or even small) loans months before applying for the mortgage. As we will discuss soon, it is necessary to plan ahead once you are in the mind of applying for a home loan.
2. Improve your credit rating
Of course, once you follow the recommendations above, it will help with your credit score and credit history – the first thing lenders will check when evaluating your home loan application. Credit scores traditionally start at around 300. However, according to home loan experts, one needs a minimum score of around 650 to 750 (depending on the lender) to be approved for a home loan. However, you obviously need to aim for a higher credit score in order to increase your chances. Also, remember that a high credit score will also pave the way for lower interest rates.
Another thing to consider is your credit history. Obtain a copy of your credit history (you can request this from national credit bureaus such as Experian and Equifax) and check that no defaults or negative repayments are recorded. Sometimes misreporting by companies can mean you’re facing problems when there really aren’t any.
Also, it is important to check the history sometime before planning to submit your mortgage application. This way you will have time to point out errors and sort them out in time. However, be sure not to do too many credit checks as this may arouse suspicion from lenders. We recommend that applicants do two credit checks, once about three months before applying for the loan and finally immediately before submitting the application.
3. Have enough savings
This is of course important for the down payment you will have to pay for the purchase of your property. Most lenders will expect your loan to value ratio to be between 75-80%, which means you will need to cover 20-25% of the value of your chosen property out of pocket.
Although rare, a handful of lenders can finance up to 90-95% of the property’s value. In such cases, however, you will have to pay a one-time premium in the form of LMI (Lenders’ Mortgage Insurance) to partially offset the risk the lender is taking on.
This again shows the importance of planning months (or even years) before applying for a mortgage. Plus, once you can show your lender a healthy savings history, it will further greatly improve your chances of getting mortgage approval as well as a lower interest rate.
4. Avoid Career Changes Before Application
Lenders place great importance on the job stability factor of the applicant. Generally, lending institutions prefer borrowers with stable full-time jobs, and your chances of getting loan approval generally increase the longer you work with your current business. So, if you are considering a career change, you may have to put it on hold for a while before applying for the loan.
The above, however, does not mean that persons who are self-employed, or individual contractors, or casual/part-time employees, etc. have no chance of getting a home loan. There are lenders who offer home loan products with minimum employment requirements (often referred to as low cost loans). However, as you might expect, lenders issue higher interest rates and restrictive repayment options for these types of mortgage products.
5. Stick to one mortgage application at a time
This is an important factor that is however often overlooked by applicants. Once you submit multiple loan applications to different mortgage lenders at the same time, this is recorded in your credit file and will be interpreted as a red flag by lenders. As a result, your best chance of getting approved for a home loan is when you apply for one loan at a time.
So first take your time to do the necessary research and compare home loan products offered by different mortgage lenders. And based on that research, determine where to apply and what type of loan product will best meet your current needs.