Avoid the red flags to get the green light on your loan

Think your finances are ready for a home loan? It’s worth seeing them from a lender’s perspective first.

When you apply for a mortgage, lenders look at more than just your income and deposit. They’ll consider your debts, spending patterns, credit history and how you manage your money to decide whether they’ll approve a loan.

Not everyone ticks the right boxes in their application. In fact, more than eight per cent of mortgage submissions face a knockback or require major restructuring.ⁱ

Just the fear of failure can be enough to make people think twice about applying, as almost one in five Australians avoid applying for a home loan altogether due to concerns of rejection.ⁱⁱ

Knowing what can raise a red flag, how your credit score fits into the picture and what lenders are looking for can help you prepare for a successful application with confidence.

So, what are lenders looking for?

When you apply for a home loan, a lender wants to know that you can afford and maintain the repayments, even when interest rates increase.

Your income is a big part of this. Lenders consider how much you earn, where your income comes from and how consistent it is. Your employment history can also matter, particularly if you have recently changed jobs, work casually or are self-employed.

They take into account your existing debts including; credit cards, car loans, personal loans and buy now pay later accounts. Even if you don’t owe anything on your credit card, the credit limit itself can affect how much you can borrow.

Everyday spending matters too. Lenders review your living expenses to understand what you’re spending on groceries and bills to transport, subscriptions and entertainment. You don’t need to stop enjoying life because you’re planning to buy a home, it’s about showing that your spending is manageable and you can afford your commitments and a new home loan.

What could raise a red flag?

A few things that can make a lender look more closely at your application include; missed repayments, defaults, high levels of debt and lots of recent credit applications can all be potential concerns. Regularly using an overdraft or relying on credit to cover everyday expenses can also suggest that your finances are under pressure.

Lenders will also check your credit score to understand how you manage credit.

Your credit score

Think of your credit score as a snapshot of how you’ve handled credit in the past.

Your score is based on information in your credit report, including your credit accounts, repayment history, credit applications and any defaults.

A strong credit history can help support a home loan application, in conjunction with your overall financial position.

How can you check your credit score?

Before you begin the application process, check your credit report yourself. You can request a free copy from credit reporting bodies such as Equifax and Experian.

Once you have it, check that the information is correct. Make sure the accounts and debts listed actually belong to you and look for anything unusual or incorrect in your repayment history.

Checking your report early gives you time to deal with anything that doesn’t look right.

What if you find an error?

Mistakes happen, so don’t assume everything on your credit report is accurate.

If you find something that isn’t correct, ask the credit reporting body or the lender that provided the information to investigate and correct it. This can be done for free. Supporting documents, such as evidence of a payment, can help resolve the issue.

It’s also important to be wary of anyone promising to “fix” your credit score for a fee. Accurate information can’t simply be removed by a third party.

Getting yourself loan-ready

If buying a home is on your radar, get organised before you find the property you want.

Stay on top of your repayments, avoid unnecessary new debt and keep an eye on your credit report. If you have unused credit cards or other accounts, it may be worth reviewing them before applying. Most importantly, don’t make big financial changes without understanding how they could affect your borrowing capacity.

We can work with you to identify possible red flags that may affect your application and help you get the green light on your home loan so you can take the next step with confidence. 

i Australian Credit Solutions | Rejections
ii Australian Broker | Millions fear credit rejection