What people often don't realise is that you need to start preparing 3-6 months before applying for a loan. Especially if you are a first home buyer. Why so early?
Banks will be checking at least 3 months of bank statements
Banks will be reviewing your spending habits and saving patterns to gain insight into your financial conduct. Typically, banks require three months of transactional bank statements to assess your monthly spending and salary deposits. Make sure you're ready by getting your finances and records in order well ahead of time.
Some red flags the banks will be looking out for
- Buy now Pay later (e.g. Afterpay)
- Undisclosed debts
- Credit card payments and limits
- Is your account overdrawn from over spending?
- Excessive spending on Uber Eats
- Gambling transactions (e.g Sportsbet)
- Are you living from pay to pay
- A poor credit score
What is a Credit Score?
A credit score is a number that helps lenders decide if they’ll give you a loan. It’s based on how much you’ve borrowed, how often you apply for credit, and if you pay on time. You can check your credit score for free from credit reporting agencies or online providers (avoid any that request payment).
Here is a link to a free credit report from Equifax
If you’re unsure about your score, a mortgage broker can help you understand it and what it means for your home loan options.
Action Plan!
- Be careful about using services like AfterPay: Reliance on Buy Now Pay later products including AfterPay, ZipPay, PayPal's Pay in 4 can negatively impact your credit score. A missed payment on one of these could be enough for a bank to decline your application.
- Disconnect from any Gambling accounts: Transactions from gambling sites like Sportsbet, TAB, Bet365 are a major red flag for lenders, as they may raise concerns about your financial stability and income reliability.
- Reduce Your Credit Card Limits: High limits can affect your borrowing capacity as banks will assume you are making repayments based on the limit, not your balance. It's best if you have no credit cards, or just one card with a low limit.
- Remove Food Delivery Apps: These kinds of transactions won't impact your credit score, but a bank may see this as irresponsible spending. Cutting down on unnecessary expenses will also boost your savings!
- Create and Follow a Budget: Track your spending and identify areas to save.
- Set Up a Separate Savings Account: Start saving regularly to demonstrate financial discipline. Having a seperate account makes it easier to demonstrate a regular savings habit. Plus it's motivating to see the balance grow!
Preparing early can significantly improve your chances of securing a home loan. By managing your finances wisely and understanding what banks look for, you can make your dream of owning a home a reality.
Ready to take the first step toward home ownership?
Buying your first home is a big step, but with the right preparation and knowledge, you can handle it with confidence. Every situation is unique, so feel free to reach out for a no-strings-attached chat to talk about your specific needs.
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