Buying a property? How to be the ideal borrower and get approved for a home loan

If you’re looking to buy a property, chances are you’ve thought about how you can come across to home loan lenders as the ideal borrower. Lenders assess several factors like your income, your credit score and any other debts you might have when deciding whether to lend you money for a home loan.

While this might seem daunting, there are simple things you can do to take charge of the home loan application process and appeal to lenders as a low risk borrower.

In this article, we’ll outline how lenders actually assess your home loan application and some things you can do to make yourself an ideal borrower that lenders will want to loan to.

How do lenders actually assess a home loan application?

When reviewing a home loan application, lenders will take several factors into account to determine both your borrowing power and your ability to repay (or service) the loan. This then helps them to decide how risky you would be to them as a borrower. The main factors lenders consider when they assess a home loan application are your assets, liabilities, income and expenses:

• What assets you have: these can include your savings, cars, superannuation, as well as any stocks and investment properties
• Your living expenses: you’ll need to declare all your monthly expenses in detail. Your lender will then review your recent bank statements to ensure these align and that you have good spending habits
• Your income: a stable income is important so lenders can see whether you will be able to repay a home loan as well as keep up with your everyday expenses. Your income will include your primary job as well as any side hustles
• Your credit score: a good credit score is important to lenders as it helps them determine your risk profile
• Any other debt or liabilities you have: this might be a university HECS/HELP debt, personal loan, car loan, credit cards and any other home loans you may have
• Your deposit: lenders will look for a sizable deposit and evidence of regular savings, but there are plenty of options for those with lower deposits.

Keep reading for our step-by-step guide on how to address each of these lending criteria in the home buying process and become the ideal borrower.

Step 1. Demonstrate good saving habits

Demonstrating to lenders that you are a habitual saver will help to make you the ideal borrower. Savings are an asset, so this is looked on favourably by lenders.

If you can show lenders that you regularly put money into a savings account (as well as accumulating a substantial home loan deposit - more on that later), this will lower your perceived risk as a borrower.

We know it can be tricky to increase the funds in your savings account while also trying to save up a house deposit, but every little bit counts. Perhaps setting up an automatic direct debit so some of your income goes directly to a savings account could help. That way, the process is taken care of for you, and your savings can be set on autopilot.

Step 2. Show that you live within your means

You’ve probably heard the refrain ‘to live within your means’ plenty of times before. While it might sound overly simplistic, it’s solid advice when it comes to being the ideal borrower.

Living within your means simply means to spend less than you earn. While this is easier for some than others, it means that when you can, reducing your reliance on debts like credit cards and car loans will help reduce your risk as a borrower. Instead of having a credit card for unexpected costs, it could be a good idea to put money into an emergency fund.

To live within your means also might prompt you to review your lifestyle spending habits. Do you find yourself splurging on clothes regularly or ordering from food delivery services frequently? You don’t have to eliminate these expenses altogether, but cutting down on unnecessary expenses where you’re able to helps. This is because lenders will review your spending habits in your bank statements thoroughly when you apply for a loan.

Step 3. Maintain a stable income

Again, holding down stable employment can be easier said than done, especially given the widespread job losses due to the COVID-19 pandemic. However, it is important when it comes to proving to lenders that you’re a low risk borrower.

Stable income shows to a lender that you have consistent cash flow that can be used to repay a mortgage. To a lender, this reduces the risk that you’ll default on your home loan, because you have steady income to rely on.

Because lenders prefer borrowers with stable income, it’s usually better to have full time employment rather than casual or contract work. Also, if you’re on your probationary period at a job, it might be better to wait until this has passed to better your chances of getting approved for a home loan.

It’s important to note that all income should be declared in a home loan application - that includes your side hustle!

If your income is considered less stable (for example, a self-employed freelancer), don’t be dismayed - it is still absolutely possible to get a home loan. Low doc home loans can be beneficial for these types of borrowers, especially if you have a good credit score and high deposit too.

Step 4. Keep an eye on your credit score

Knowing what your credit score is and maintaining a good one is key for demonstrating to lenders that you are a low risk borrower.

Your credit score is calculated based on personal and financial information about you, like how much money you have borrowed, the number of credit applications you’ve made and if you pay back loans and credit cards on time.

Your credit score is contained in your credit report, and is a number between zero and either 1,000 or 1,200. The higher the score, the less risky you’re considered to be to a lender.

If you’ve found your score is on the lower end of the scale, there are things you can do to boost it. Before you do anything, however, check with the credit reporting agency for any errors in your credit report that can be fixed.

To improve your credit score, you can:

• Make any loan, credit card, rent or bill payments on time
• Lower your credit card limit
• Limit the amount of credit applications you make.

Improving your credit score won’t happen overnight. As you make changes towards lifting your score, remember to have patience - the results take time.

Make sure you check your credit score regularly. This means you can not only see when it might need improving, but also if there are any errors which could indicate identity fraud (for example, someone getting credit cards in your name).

Step 5. Eliminate other debt

Reducing the debt you owe can have a huge impact on your borrowing power. Each credit card or car loan you need to repay reduces your ability to service the mortgage and ultimately your borrowing capability in the bank's eyes.

While it may not be possible for some people to substantially reduce or eliminate their debt altogether before applying for a home loan, doing so shows that you’re living within your means, therefore lowering your risk as a borrower.

If you still have some debt to pay off, making sure you make repayments on time will help prove your reliability as a borrower.

Step 6. Save up a big deposit

It might seem obvious, but saving up a good deposit for your home loan is a clear way to show lenders that you can save.

If you’re worried you might not be able to save up a 20% deposit, don’t be discouraged! It’s certainly possible to get a home loan with a 15%, 10% and even 5% deposit. You may have to pay Lenders Mortgage Insurance (LMI) on a deposit less than 20%, however there are plenty of home loan options out there that offer free or discounted LMI. It’s worth comparing products or speaking to an expert to work out your options.

Taking a few simple steps can drastically reduce how risky lenders perceive you to be as a borrower. If you need help getting your finances in shape before you delve into the home buying process, our Home Loan Specialists are here to help.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.