Applying for a home loan is the process of securing finance from a lender to purchase a property. In this guide you’ll learn how the home loan application process works and what you can do to increase the chances of getting approved.
Before you apply for a home loan, make sure you:
- Have calculated your borrowing capacity
- Understand your credit score
- Understand how pre-approval works
- Understand the application process
- Are ready to buy a home
- Have the required supporting documents for your application
What you need to apply for a home loan
Ready to apply for a home loan? It’s a good idea to prepare everything you need for your home loan application in advance to make sure the process goes as smoothly as possible.
To apply for a home loan, you will need to:
- Collect all supporting documents for your application
- Complete and submit a pre-approval application
- Receive pre-approval
- Begin the sale & purchase process for a property
- Submit details of the property and purchase to the lender
- Receive formal approval on your home loan
Home loan pre-approval application
Before you look at a single property you need to get home loan pre-approval. Home loan pre-approval is essentially an indication from a lender that they will lend you a certain amount of money based on the information provided.
Pre-approval is an important part of the home loan application process - it ensures you can provide sufficient documentation to meet lender approval criteria, and will also provide an idea of how much you can borrow to buy a property.
How does pre-approval work?
Applying for home loan pre-approval is the first step towards securing a new home loan and buying a home. To get pre-approval you’ll need to:
- Choose a lender or mortgage broker and contact them
- Supply the lender or broker with the required documentation
- Fill out and submit a home loan application form (this can usually be done online)
Once the lender receives your application, they’ll assess the information and supporting documentation.
Documents you need to apply for a home loan
When applying for a home loan, you’ll need to provide a lender with sufficient supporting documentation. These are used to prove your identity, income and level of debt, and allow a lender to assess your ability to meet home loan repayments. Supporting documentation for a home loan application may include:
- Proof of identity
- Proof of income
- Proof of debt
- Proof of savings, investments and assets
- Record of spending - Include at least three months of bank transactions so that your bank can assess your level of spending.
- Gift letter - If you are receiving part of your deposit as a gift you’ll need a letter from the gifter to confirm that.
DOCUMENTS YOU'LL NEED
Proof of identity
Proof of identity is a crucial part of the home loan application process. To reduce fraud, the Australian Government uses a 100-point personal identification system. Each type of identification is assigned a certain number of points, and borrowers must provide documents that equal at least 100 points to prove their identity when applying for a home loan.
Home Loan 100-Point Personal Identification System
| Primary documents (75 points) | Secondary (40 points) | Secondary (35 points) | Secondary (25 points) |
|---|---|---|---|
Birth certificate Passport Citizenship certificate | Australian driver licence ID card issued to public employees Student ID | Council rates notice Document from an employer Mortgage documents | Medicare card EFTPOS card Foreign driver licence Marriage certificate |
DOCUMENTS YOU'LL NEED
Proof of income
Proof of income and employment is provided to lenders so they can accurately assess your ability to meet home loan repayments. Each lender may request specific documents to support your application, but this will generally include:
- A contract of employment
- At least three months of payslips and/or invoices
- Australian tax returns for the previous 18 months
DOCUMENTS YOU'LL NEED
Proof of debt
Your lender will take your level of debt into account when considering your application, and as such you should include proof of your debt when you apply including:
- Credit card statements
- Personal or car loan statements
- Documents proving any debt you currently hold
DOCUMENTS YOU'LL NEED
Proof of savings, investments and assets
If you have other assets your bank may look upon your application more favourably. Include proof if you have:
- Managed funds or indexed funds
- Shares, stocks or bonds
- Other properties
- Savings accounts
Self-employed home loan application
If you’re self-employed you may not have a tax return, payslips or employment contracts to prove your income. Instead, you may apply for a low doc loan, which requires less supporting documentation than a normal home loan.
To apply you may still have to provide:
- Up to two years of full financial statements, including profit and loss and tax returns.
- A self-certification where you sign a document confirming that you have sufficient income to meet repayments.
- Account transaction statements, including credit cards.
Low doc loans aren’t all the same - different lenders will require different levels of proof before they lend to you.
Bad credit home loan application
If you’ve got bad credit you may need to supply additional supporting evidence to prove to your lender that you are able to make mortgage repayments. This might include any proof that you’ve:
- Paid off defaults on your credit file.
- Been in contact with creditors to arrange repayment plans.
- Consistently made repayments on time.
- Are spending less than you’re earning.
If you’ve got bad credit it may be best to approach a mortgage broker, or specialist bad credit lender as they’ll be more likely to approve your loan application.
Where to apply for a home loan
There are four types of lenders you should consider when applying for a home loan, including:
- Retail banks
- Mortgage brokers
- Non-bank lenders
- Credit unions or mutual banks
Each lender has its advantages and disadvantages and ultimately it’s up to you to decide which is best for you.
Home Loan Lenders Pros and Cons
| Home Loan Lender | Pros | Cons |
|---|---|---|
Banks | Well known brand You may be familiar with their products and services | Limited to only products they offer Conservative when assessing low doc or low deposit loan applications |
Mortgage Broker | Convenient They’ll take care of most of the application process Access to the products of several lenders Tailored expert advice Often fully online service Free service for clients | Could be biased toward certain financial institutions or products May not have access to all lenders |
Credit Union | May have lower interest rates and fees Personalised and local service | Smaller with a limited physical presence Fewer products than big banks |
Non-bank lenders | Specialise in certain loan types like low doc, or low deposit loans Less strict credit requirements than big banks Personalised Mostly online service | Cannot provide savings or transaction accounts Limited branch and physical presence Not regulated by APRA |
Apply for a home loan with a bank
A bank is a business that is licensed as an Authorised Deposit-Taking Institution (ADI) through Australia’s financial regulator - the Australian Prudential Regulation Authority. A few of the most well-known banks in Australia include:
- ANZ
- Commonwealth Bank
- NAB
- Westpac
- ING
- Suncorp
- Bank of Queensland
Bank Home Loan Pros and Cons
Pros
- If you’re already a customer with the bank you’ll be familiar with their services and trust their brand. You may also receive discounts for bundling services.
- You may be able to manage, view and pay your mortgage from within your existing online banking interface, as well as making automatic payments from existing linked accounts.
- Big-name banks might be more trustworthy and accountable than a smaller, less-well-known provider.
Cons
- You are limited to that bank’s range of home loan products and may not be able to compare other options on the market.
- Banks can be conservative. If you have a bad credit history or poor documentation your application may be denied.
- Most banks have online application options but you’ll usually still have to physically visit their office to complete your application.
- Banks have no obligation or incentive to tell you that there is another better or more suitable home loan product offered elsewhere.
Apply for a home loan with a mortgage broker
A mortgage broker is an intermediary between you and other lenders, including banks, non-banks and credit unions. They act on your behalf and in your interest to help you prepare and submit your home loan application, and may also negotiate with lenders to secure a suitable home loan.
Mortgage brokers will also provide advice tailored to your situation and assist with:
- Improving the strength of your application
- Choosing and tailor a home loan that’s suited to you
- Choosing a lender that’s likely to approve your application
Mortgage Broker Home Loan Pros and Cons
Pros
- They’ll take care of most of the application process for you including communicating with lenders, solicitors and valuers.
- Access to the products of several lenders, which provides you with more choice and saves you the time of shopping around.
- Some mortgage brokers offer a fully online service so you can apply without visiting their offices.
- Mortgage brokers are usually paid via commission by lenders so their service costs you nothing.
Cons
- Some mortgage brokers may be biased toward certain banks or certain products that offer a higher commission.
- Some lenders don’t work with brokers so you may not have access to all the financial products on the market.
Apply for a home loan with a credit union
Credit unions, otherwise known as mutual banks, are banks that are owned by their customers. They operate for the purpose of providing banking services to their members, rather than to generate shareholder returns and profits like retail banks.
When customers use a credit union they become members. Instead of using profits to issue dividends to shareholders, credit unions use their profits to offer benefits to their members.
Credit Union Home Loan Pros and Cons
Pros
- Some credit unions may have lower interest rates and fees than big banks due to their member-owned business models.
- Credit unions are often community-focussed organisations so they may offer more personal, tailored service.
Cons
- Credit unions are often smaller and may only have a local presence in limited areas. This may make it difficult to apply for a home loan depending on where you are.
- Credit unions may not have as many products as big banks, giving you less choice.
Apply for a home loan with a non-bank lender
Non-bank lenders are financial institutions without an ADI license. They function similarly to banks and can still offer home loans and other financial products.
Non-Bank Lender Home Loan Pros and Cons
Pros
- Non-bank lenders often specialise in certain types of loans, including bad credit, low doc or low deposit loans.
- They can be more lenient in assessing how much debt you can service.
- They may offer shorter turnaround times and more personalised service than big banks.
- Most of their services are offered online.
Cons
- hey cannot provide savings or checking accounts and their other products may be more limited than big banks.
- Limited branches and physical presence.
- They are not regulated by APRA. However, they must follow the National Consumer Credit Protection Act (NCCP).
What to do if your home loan application is declined
If your home loan application is denied don’t reapply straight away. Take some time to find out why you were unsuccessful so that you can improve your application next time.
Common reasons why home loan applications are denied
- Overpriced properties
- Apartments less than 40 sqm
- Student accommodation.
- Properties with structural or geological issues
- Properties in bad neighbourhoods. Oversupplied properties.
- Oversupplied properties.
Risky properties might include
- Bad credit history
- Insufficient evidence that you can make repayments
- Deposit is too small
- Not enough proof of savings
- Failure to provide correct or complete documentation
- The property you’re buying is too expensive for you
- The property you’re buying is deemed risky by the bank.
The easiest way to find out why your application was denied is to simply ask your lender. Once you know what the problem is, you’re ready to solve it.
How to improve your home loan application
Having your application denied is frustrating but there’s plenty that you can do to improve it for next time:
- Increase the size of your deposit. The bigger your deposit the more likely a lender is to approve your application.
- Pay off debt. Debt can impact your ability to service a loan so lenders may be hesitant to lend to you if you’ve got maxed-out credit cards or personal loans.
- Save more. Regularly put money into a savings account to prove to your lender that you can be financially disciplined and live within your means.
- Stay in the same job. If you’ve worked for the same business for more than 12 months you’ll be able to show your lender you have a stable income and job security.
- Check your credit score. If your credit score is bad you can improve it by reducing your debt, making repayments on time and querying any inaccuracies on your credit report.
- Change your expectations. Be realistic when choosing a home. Buying something cheaper and applying for a smaller loan will increase your chances.
- Don’t overpay. The bank may deny your home loan application if they believe you’re paying too much for a property. Always do your research and be sure of a property’s value before making an offer.
If your application is denied...
If you do get your application denied, don’t re-apply straight away. Take 3-12 months to get your finances in order then re-apply when you’re in better financial shape.
If your first unsuccessful application was with a major bank, it may be a good idea to try working with a mortgage broker, or specialist non-bank lender for your next application. Mortgage brokers can help improve your application and negotiate with lenders, while smaller non-bank lenders may have less-strict credit requirements.
Unconditional home loan approval
Unconditional approval is the final stage in the home loan process. At this stage, your bank has formally reviewed your application and supporting documents and confirmed that they will lend you a certain amount to buy the property.
To secure unconditional home loan approval you’ll need to:
- Make a successful offer on a property
- Provide your lender with the signed contract of sale
- Provide any additional documentation your lender requires.
At this stage, your lender will review the property you’ve chosen as well as your documentation. They may also:
- Carry out thorough credit checks.
- Validate your circumstances (income, employment)
- Request a formal valuation of the property.
Once the lender is satisfied they will send you or your broker a formal loan offer and loan offer documents for you to review and sign.
Congratulations! You’ve secured a home loan and you’re ready for settlement.
Preparing for settlement checklist
Settlement day can be daunting, but it needn’t be. Make sure you’ve ticked all the boxes in advance so that you’re prepared:
- Contacted a conveyancer to act as your agent
- Your conveyancer has checked the contract of sale is in order.
- You’ve organised home insurance from settlement date (in many cases lenders won’t approve your home loan if you haven’t)
- Have money on hand to pay for stamp duty, lender’s mortgage insurance, and any other fees and charges involved in settlement.
On the day before settlement, you’ll also have to complete a final inspection of the property to make sure everything’s in order before the purchase is completed. Once you’ve completed the final inspection you’re ready to settle and take ownership of the property.
Use the stamp duty calculator to estimate stamp duty on properties in Australia.
At this stage, your lender draws down your loan to pay the vendor and you pay stamp duty. Then the title to the property will be transferred to your name and you can pick the keys up and move into your new home.
Summary
Applying for a home loan is the first step on the road to homeownership. Before you view a single home it’s important to get pre-approval, which is an indication from your lender that they’ll lend you a certain amount. This gives you a budget to work with when house hunting.
Before applying you should ensure that you have all the correct documentation and have considered what type of loan is best for you.
- Low doc loans are ideal for self-employed people without the normal documentation.
- Bad credit loans are suited to those with poor credit scores, or those who’ve filed for bankruptcy in the past.
Once you’ve found a home and signed a sale of contract your lender will issue you formal home loan approval and you’re ready to settle and complete the purchase.
In the unlikely event that your home loan application is denied, don’t panic. Ask your lender why your application was unsuccessful, take some time to reorganise your finances and reapply when you’re in a better position.
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Shaun
McGowan
Shaun McGowan
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.
