Are you keen to get into the housing market but are worried that you may not be accepted for finance? It’s a common concern for first-time home buyers, so here are some tips to not only demonstrate to banks and lenders that you could be a good borrower, but also help give you some confidence in your ability to manage and repay debt.
If you’ve ever applied for a loan, credit card or used a ‘Buy Now, Pay Later’ service, you have a credit score. Your credit score (or credit rating) is a number that gives lenders an indication of your financial situation. The higher the number – or score – you have, the better.
You can access your credit score for free, but you need to bear in mind that making multiple enquiries could negatively impact your score. Every time you apply for any kind of credit it will be taken into consideration in your credit score.
You can learn more about credit ratings and how to check yours, in Your Credit Rating Explained.
Banks and financial institutions want to know that you have sufficient money coming in to enable you to pay your loan repayments. The best way to prove this is by having a stable income from employment.
Generally, lenders favour a stable employment history and full-time work over casual or contracted work because it’s an indication that you can make repayments regularly. If this isn’t you, don’t despair – it doesn’t necessarily mean you’ll be knocked back for finance – but you may need to supply additional income documentation such as an income statement for the last financial year and your employment contract.
Our budgeting app, mymo by P&N Bank, allows you to see what money you have coming in and out, easily and clearly. Just connect your P&N accounts and any other accounts you have with other Australian banks or financial institutions to see an overview of your finances.
The deposit you put towards a property gives your lender security and demonstrates your ability to save. Your bank or financial institution may view you as a safer borrower if you’ve had the discipline to save a larger amount towards your purchase.
If you have saved a deposit of 20% or more, you will generally avoid paying Lender’s Mortgage Insurance (LMI). This insurance (paid for by the borrower) protects the lender in the event you default on your loan and there is a shortfall from the property sale amount and loan amount owing. It’s not uncommon for banks and lenders to offer a better deal to borrowers with larger deposits.
If you want to know more, our article on deposits and LMI is worth a read.
Being able to show prospective lenders that you have a good saving history can go a long way. Like with growing your deposit, regular saving shows discipline and good financial practices.
If all your savings have gone into your home deposit fund, don’t worry. There are several ways to demonstrate you have good saving habits, including putting tax refunds or other windfalls such as work bonuses straight into a savings account. You may also find that it helps if you can show that you use and stick to a budget, and that it includes regularly adding money to savings.
This one may seem obvious, and is linked to some of the other points, but it’s an important one. Another way to show you may be a good borrower is to keep debt to a minimum – and pay it on time and off quickly when it accrues.
This is what your home loan lender will be hoping you’ll do if they take you on as a mortgage customer. Being able to prove that you pay off your debt on time every month (or are completely debt free), may show that you’re the sort of borrower that the bank would like to have.
If you have existing debt that you’re struggling with or are worried that it may impact your home-buying options, visit the National Debt Helpline website. There is lots of helpful information and solutions available for debt problems of all sizes.
It’s important to remember that every borrower is different, and this can also be said about lenders too. There isn’t a ‘one-size fits all’ approach when it comes to financing a home purchase. It’s also worthwhile remembering that buying your first home isn’t something that happens overnight. Ensure you get your financial foundations on the right track with the tips above, and you’ll be in a great place to start your home-owning journey.
If you would like further information or want to discuss a property purchase, we can help. Make an appointment with one of our home loan specialists and get started on your home buying journey.
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