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How to improve your chances of getting a home loan

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It's two steps forward, one step back for buyers in a market that's changing almost daily.

Yes, house prices are dropping (about time, shout the millennials) and there's finally room to move at your local auctions.

But these considerable victories have been drowned out by the sound of the banks hitting the brakes on home lending.

What's changed?

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Two things. Nothing grabs the attention of our banks more than a royal commission. The screwdrivers are out and lending practices are being tightened.

That means the days of rubber-stamping application forms, without forensic scrutiny of expenses, are long gone. Banks want to know what you're spending, line by line.

Second, the government regulators' focus on limiting investor and interest-only borrowing has turned everyday mum and dad homeowners into sought-after customers, particularly if you've got a wad of savings to add to your application.

Together, these two changes leave a trail of clues on what the banks are looking for when you submit that all-important application:

1. Have a 20% deposit

No-deposit home loans are the stuff of folklore these days, while loans allowing a 5% deposit are becoming thin on the ground. These days you need a 20% down payment if you're serious about being approved.

2. Pay principal and interest

Interest-only terms hit fever pitch back in June 2015 when an astounding 46% of new home loans written were interest only. Fast-forward almost three years and the government has had enough. Only three in every 10 loans written can now be interest only so if you offer to pay principal and interest you'll be in their good books already.

3. Live in the home you buy

Owner-occupiers are hot property for banks. They are safe, likely to pay their mortgage on time and likely to stay put for a while. If that's you, you've got their attention.

4. Cut up your credit cards

When assessing your application, banks look at your credit card limits and assume the worst: that is, you've maxed them out and are only making the minimum repayment. That's going to put a big dent in your serviceability unless you can prove your credit card is in pieces.

5. Put your budget on a diet ... six months out

Banks are reportedly starting to look through bank accounts line by line to better understand how much you spend each month. Start shopping at Aldi, curb the late-night parties and start catching the bus to work rather than an Uber. You'll save money and look like a budget black belt when your statements go under the microscope.

6. New customers are more attractive than old ones

Despite tightening lending standards, our banks are still very much open for business, particularly if it means getting new business in the door. Banks often have lower rates for new customers and are more likely to waive fees if you meet some of the "ideal borrower" conditions mentioned.

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