What lenders are looking for when you apply for a home loan
With a tightening of lending restrictions and increased pressure on the banks as a result of the fallout from the royal commission, the lending environment is going to become more challenging for consumers.
So what are lenders looking for when they review a loan application?
Banks use a credit rating system which includes your credit score when processing your loan application.
Your credit score is based on information such as how many enquiries you have made with credit providers and how good you are at paying your bills on time.
Check your credit score to find out what your score is like and if there are mistakes, get them fixed. If there have been issues with late bill payment in the past, make an effort to start paying your bills on time. Everything helps when it comes to improving your credit score.
Lenders need to see that you have a secure income so you can repay the money you have borrowed. If you are self-employed, having up-to-date tax returns which show you have a good track record of generating income is very important.
Lenders like to see that you can save money and your income exceeds your lifestyle expenses. Make an effort to save each week to build your savings.
While lenders like to see that you have savings in the bank, they also want to ensure your fixed expenses are manageable, particularly if your circumstances change. Try and reduce your fixed expenses where possible. Think about what you really need in your life and whether every commitment is necessary. If not, get rid of it.
Other loans and credit cards
Lenders will take into account other debt you need to service. Where you can, consolidate your debt through a personal loan. If the reason for your loan is to do this, ensure you have all the other key things mentioned in place to position yourself well for the loan.
All lenders like stability, especially in the unsecured market. Changing your job every three months is not appealing and will affect the lenders view of your application. The same applies to someone constantly changing address. In the unsecured personal loan market stability is king.
From July 1, new legislation will come into place about the type of information a lender is required to provide regarding your credit facilities and your ongoing debt repayments.
This detailed information will be recorded on your credit file and can significantly affect your borrowing abilities in the future.
Prior to this, your credit file didn't hold a lot of information on your monthly repayment history, credit limits or account open and close dates.
Comprehensive Credit Reporting (CCR) mandates the reporting of detailed positive and negative repayment history on your credit file.
This means lenders will report 24 months of repayment history, account open and close dates and credit limits for all open consumer credit accounts, which includes home loans, credit cards and personal loans.
If you pay your debts on time, this positive information will be included on your credit file. If you occasionally make a late payment or miss a payment, this will affect your credit score.
While the finance sector is becoming more competitive, a tightening of lending restrictions and the availability of more consumer finance information also means it is more important than ever to get things in order.