Applying for a mortgage can feel overwhelming, but with a bit of planning and preparation, you can present a strong case to lenders. A “perfect” loan application demonstrates not only your income but also responsible financial management and the ability to meet repayments comfortably. Whether you are applying for a mortgage for your first home, are looking to top-up, or if you’re planning to extend your lending to build a property portfolio, the same premises apply. 

Here’s a step-by-step guide to preparing a solid application that can boost your chances of approval.

1. Start preparing early

To ensure your mortgage application stands out, start preparing at least six-to-twelve months before you plan to apply. This timeframe allows you to make adjustments that can improve your financial position and borrowing power. Early preparation also gives you time to address any potential issues and build a strong financial profile that lenders will find appealing.

2. Tidy Up Your Finances

Lenders usually require three months’ worth of bank statements to evaluate your spending habits and overall financial health. Here’s how you can ensure you’re putting your best foot forward:

• Reduce unnecessary expenses: Review your spending and identify areas where you can cut back, such as dining out, streaming subscriptions, or impulse shopping. Lenders are more likely to approve your application if they see that you can manage your spending effectively.
• Avoid overdrafts: Keep your account balance positive and steer clear of overdrafts, which may signal poor financial management.

A clean financial record reflects responsible money management, increasing your chances of securing a loan.

3. Pay Off and Reduce Your Credit Card Debt

Credit card debt can significantly impact your borrowing capacity. Even if you don’t have a high balance, your credit limit still matters:

• Pay off your balance: Aim to clear your credit card debt before applying for a mortgage. High balances can indicate financial strain and reduce your perceived ability to repay a home loan.
• Lower your credit limit: Lenders consider your total credit limit as potential debt, regardless of your actual balance. For example, if you have a $10,000 limit but only owe $500, banks may still factor in the full $10,000 as a liability. Reducing your limit can improve your application by reducing perceived debt.

By managing credit card debt proactively, you demonstrate financial stability and make yourself a more attractive borrower.

4. Consolidate or Eliminate Debt

If you have multiple personal loans, hire purchases, or other debts, consider consolidating them into a single payment or, ideally, paying them off entirely. High debt levels affect your debt-to-income ratio, which is a critical factor in determining how much you can borrow.

Consolidating debt can simplify your repayments and potentially lower your interest costs. However, if you can eliminate debts altogether, it shows lenders that you’re taking a proactive approach to financial management, boosting your appeal.

5. Demonstrate Good Savings Habits

Lenders want to see evidence that you can manage money responsibly and save consistently. Building a history of regular savings can enhance your loan application:

• Set up an automatic savings plan: Establishing a recurring transfer to your savings account (that you don’t regularly dip into) shows a clear commitment to saving and makes it easier to build up your deposit.
• Make consistent contributions: Lenders prefer regular savings over sporadic lump sums, as this indicates good financial discipline.
• Aim for a higher deposit: A deposit of 20% or more not only strengthens your application but can also help you avoid additional costs like higher interest rates.
• Exceed mortgage payments: If your current rent and savings exceed what your mortgage payments will be, it demonstrates to lenders that you can handle the repayment amount, based on current behaviour.

Good savings habits suggest that you’re well-prepared for mortgage repayments, increasing your chances of approval.

6. Consistency of Income

Your income consistency is critical in a mortgage application. Your lender will consider:

• Regular payment amounts: Ensure that your income is consistent over the previous three months. For example, if you work 40 hours per week regularly, the bank will use that as your income benchmark. However, if you occasionally work fewer hours, the bank may use the lower figure, potentially reducing your borrowing capacity.
• If you can evidence your income: Provide recent payslips, bank deposits, or tax returns as proof of income.

Self-employed consideration: If you’re self-employed, be cautious about reducing your income too much for tax purposes. While it can lower your tax bill, it may also reduce your borrowing capacity, as your declared income will be lower.

7. Review Your Credit Report

Your credit score plays a major role in your mortgage application. Before you apply, check your credit report to ensure it’s accurate and up to date.  

• Check for errors: Errors on your credit report can hurt your credit score, so it’s important to address them early.
• Resolve past issues: If you’ve had issues like missed payments or defaults in the past, try to resolve them before applying.

A clean credit report reflects well on you and can make the difference in securing your desired loan.

8. Avoid Large Purchases or New Loans

In the months leading up to your mortgage application, avoid making large purchases or taking on new debt. These can increase your debt-to-income ratio, potentially reducing the amount you can borrow.

For instance, buying a new car or financing a major expense could limit your borrowing capacity. Keeping your debt levels low and maintaining stable finances will support your application.

9. Prepare Your Documentation

Being organised can streamline your application and prevent unnecessary delays. Ensure you have the following documents ready:

• Proof of identity: Passport or driver’s licence.
• Proof of income: Recent payslips or tax returns from the past two years.
• Bank statements: At least three months of personal and savings account statements.
• Savings history: Evidence of regular savings over the past six to twelve months.
• Details of assets and liabilities: Include assets such as property or vehicles, as well as liabilities like credit cards or personal loans.

Providing complete and accurate information signals to lenders that you’re well-prepared and serious about securing a home loan.

Putting your best foot forward

Creating the perfect loan application is about presenting yourself as a low-risk borrower. By tidying up your finances, managing your debts, and demonstrating good savings habits, you can significantly improve your chances of approval. Start preparing six-to-twelve months in advance to give yourself time to make necessary adjustments.

At Threefold, our advisers can help you make a plan to achieve your home ownership dreams. We can help you navigate each step of planning and loan application process, ensuring you’re well-positioned to secure the right mortgage for your needs. To book a free consultation with a member of our team, click here. 

The content of this article should not be taken as financial advice, or a recommendation of any financial product. These insights are based on current economic commentary, market pricing for interest rates, and our personal opinion. Threefold is not liable or responsible for any information, omissions, or errors present.