How to gain home loan approval in 2022

You’ve done the hard work of saving up for a deposit for a property, only to discover the work isn’t over come mortgage application time.

And gaining mortgage approval may only become more difficult in 2022. Firstly, APRA has increased the “stress test” for home loan applicants to 3% from its previous 2.5% buffer from 1 November 2021, aiming to prevent borrowers from taking on too much debt.

And while many experts have predicted that the Reserve Bank of Australia may increase the cash rate in 2022, many lenders have already been hiking interest rates – particularly for fixed rate home loans.

Meanwhile, property prices have continued to soar despite weeks of lockdowns and restrictions across parts of the nation. The latest CoreLogic figures show that national housing values were 1.3% higher in November – the 14^th consecutive month of growth.

This means would-be borrowers may be facing a year of eye-watering property prices, paired with increasing interest rates and more strict serviceability requirements for home loans.

This is why it’s more important than ever to cross your t’s and dot your I’s when it comes to your home loan application. Whether you’ve been rejected for a home loan or want to boost your chances of approval, there are a number of steps you may take to increase your likelihood for mortgage approval in 2022.

How to improve your chances of home loan approval

• Boost your credit score

It goes without saying that your credit score and credit report are one of the most important factors of your loan application. Lenders look at your credit score to assess your reliability with repaying debt and your likelihood of defaulting on the mortgage.

The higher your credit score, the higher your chances of approval may be. Plus, lenders are more likely to reserve their lowest interest rates for borrowers with excellent credit. Before you apply for a home loan, consider grabbing a copy of your credit report and going through it with a fine-tooth comb for any errors.

If your credit score isn’t where you’d like it to be, consider working to boost it. This may include:

• Paying off your existing debts (a worthwhile step for any home loan applicants)
• Automating your repayments so you never miss a bill
• Consider lowering your credit card limit

• Due diligence on your outstanding debts

There are no hard and fast rules for why one lender may reject your application, and another may approve it. But one fairly universal rule is that having outstanding debts or unpaid bills may hurt your chances of approval.

Make a list of any outstanding debts you’ve yet to repay, including your credit card. Now, look at your budget and consider if you can funnel any more money towards these debts in the lead up to your mortgage application. Applying for a home loan debt-free may help to boost your chances. Some brokers even recommend repaying your school fees (HECS/HELP debt) before applying for a home loan.

Next, go through your history of utilities accounts. This may be a little time consuming, but you’d be surprised what the impact of an unpaid and forgotten-about phone bill from several years ago may have on your chances of approval. Your utilities repayments are reflected on your credit history, including late payments or defaults, so it may be worth checking your credit report for any issues here.

• Grow a nest egg

If you’re applying for a home loan, you’ve probably come across the term ‘genuine savings’. These simply refer to when a borrower saves up money over time through budgeting and depositing regularly into a savings account. Non-genuine savings may refer to inheritance and money gifts, tax refunds, sale of assets or shares or equity in a property.

Typically, a home loan lender may want to see proof of ‘genuine savings’ over at least a three-month period when you apply for a mortgage. This helps to demonstrate a level of financial responsibility, as you can budget effectively and display healthy financial habits.

If you’ve inherited your home deposit, for example, and have not saved any money in a separate savings account for the last few months, it may be worth building up some ‘genuine savings’ before you apply.

• Avoid the ‘great resignation’

As many Australians enjoy their post-lockdown freedoms, a growing trend has emerged amongst workers: the great resignation. Employees that stayed put in their jobs during strict restrictions are now looking for greener pastures and resigning at a higher rate.

While there is nothing wrong with resigning from a role you do not like, it’s important to keep in mind how this may impact your home loan application. Lenders look for stability in your finances, and this includes the income you bring in from your employment.

Being employed on a full-time basis for more than 3-6 months may be considered preferable, with being employed for at least 12 months in one role often considered ideal by mortgage lenders.

If you’ve recently started a new job (even one that pays significantly higher) consider holding off on your application until you’ve at least left the probation period. This may help boost your chances of loan approval.

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