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A successful home loan application depends on the interplay of four factors – your income and your expenditure; your assets and your debts. But lenders also want to see evidence of a savings and (good) credit history. Here’s what you can do to improve it.
Give me the main points
- A successful home loan application is about more than merely income.
- Lenders will look into your savings and credit histories.
- Setting up a savings plan – and designated ‘House’ account – is a must.
- Working out a realistic budget – and keeping to it – is also important.
- Try to reduce all your miscellaneous debts.
- Reduce your credit card credit limits (even if you never use them).
1. Start saving. Make a plan
The BT Australian Financial Health Index in 2013 found that a third of us live pretty much week to week, payday to payday. Thirty-five per cent have a sound savings plan, with the remaining third falling into the ‘Could Do Better’ category.
To have a good chance of getting a loan, aim to be in the 35% who've sorted their savings.
But even if you get a substantial deposit together—even if friends or family have pitched in—lenders will want proof you’re a regular saver. Why? Because a sound savings record gives them confidence you’ll meet your home loan repayments on time.
If you’ve been a bit naughty, the good news is that banks look favourably on a record that might be just six months hard saving. So set up a designated ‘House’ account and start tomorrow. Actually… today!
Note: Though banks will want proof that you’re a capable saver under your own steam, family funds can certainly help. Talk to us about the NAB Family Guarantee.
2. Sort out a budget
Having a budget—and sticking to it faithfully—is further proof to a lender that you’re financially responsible. A good ‘risk’.
We have several budgeting advice stories, but let's look briefly here at three basic principles to start with.
Your budget should be realistic
It can’t be too harsh or you won’t stick to it. You need to take into account all your spending—all those little treats (as well as the necessities) that are easily forgotten. Car repairs and maintenance, for instance, can be overlooked if you’ve had a good run over the past year or two.
Your budget should be ‘disciplined’
Just because it’s not the Budget from Hell, doesn’t mean you can enter ‘Shoes. $500 a month’ into your ‘Regular Expenses’ section. You’re working towards a long-term goal and that requires discipline and some sacrifice.
Your budget should be flexible
This doesn’t contradict the previous point. But you need a bit of wriggle room in your budget for when things don’t go to plan. If you have a setback, you can’t afford to let everything slide. It’s a great idea to keep tabs on spending with a financial management tool like NAB Money Tracker.
3. Reduce your debts
Obviously, if you’ve got a hefty overdraft and loads of credit card debt, you’re not in a good spot.
You’ve got to get your debt down and you may want to consider a debt consolidation loan so you only have one repayment to make each month. Also, balance transfers used wisely, can help reduce the amount of interest you’re paying.
If you can ‘clear the decks’—get rid of all your debt—all the better.
Note: Banks also take into account the credit limits on your cards, even if you’re not in debt at all. They’re interested in your total potential ‘risk’ exposure. So you might want to reduce your credit limits, or cut the number of cards you have.