7 Tips to Improve Your Credit Score & Get Your Loan Approved: Securing a home loan can be daunting process, especially if your credit history isn’t perfect. However, based on my experience, here are seven effective strategies that can significantly boost your chances of getting your home loan approved, even with impaired credit there is always a lender out there who will accept imperfect situations.
1. Demonstrate Your Ability to Save
One of the most important things lenders look for is a history of genuine savings. In my opinion, you should aim to show that you’ve gradually saved at least 5-10% of the property’s value over time, excluding any cash gifts. I recommend putting your money into a high-interest savings account and topping it up each month. This not only helps your savings grow faster but also demonstrates to lenders your disciplined approach to saving. When they ask for your bank statements, they will see clear evidence of your commitment to saving, which is a big plus. Something to take into consideration is that some lenders will count rent as genuine savings and will ask for a rental ledger to prove that the rent was paid consistently and on time.
2. Show ‘Clean’ Bank Statements
Lenders usually require three months of bank statements to assess your financial habits. They’ll go through your transaction history with a fine-tooth comb, looking at your spending habits and how you manage your money. From my perspective, it’s crucial to demonstrate ‘good banking conduct’. This means no arrears, overdraws, or dishonoured payments. If you have such transactions on your statements it can mean an automatic decline so checking that you have clean statements is imperative.
Additionally, keeping discretionary spending in check can help. Always aim to have a surplus in your transaction account at the end of each pay cycle or month. This shows financial stability and responsible money management, which can work in your favour. The lenders will ask for the last 3-6 months of your bank statements so it is imperative to keep them clean so you can prove to yourself and the lender in question, that you are ready to take on a large commitment like a home loan.
3. Keep Your Current Debts in ‘Good Standing’
It’s essential to stay on top of any existing loan repayments and pay off your credit card balance in full each month. This shows lenders that you prioritise your financial obligations and are less likely to default on a home loan. From my experience, maintaining a good repayment history with your current debts can reassure lenders of your reliability, significantly enhancing your loan application.
4. Consider a Guarantor
Having a guarantor can be a game-changer. Typically, a guarantor is a family member, often a parent, who offers some of their home equity as additional security for your loan. This reduces the lender’s risk, making them more inclined to approve your application. However, it’s important to understand that the lender will be going through the guarantor’s financials very thoroughly so if there are any imperfect transactions on their statements, this can equal to an automatic decline. We have seen cases in our business where the guarantor’s statements were imperfect and the lender recommended that the applicants come back in 6 months.
5. Close Any Buy Now, Pay Later Accounts
Lenders are not fans of buy now, pay later (BNPL) accounts. These types of accounts can be seen as a sign of financial strain or poor money management. If you have any BNPL accounts, I strongly advise closing them before applying for a home loan. Lenders will view the closure of these accounts positively, as it reduces your financial obligations and demonstrates your commitment to improving your financial situation. Also you may not realise that opening accounts like this will affect your credit score as each application/account is a request for credit.
6. Close Any Online Betting Accounts
Similarly, online betting accounts are a red flag for lenders. They indicate a potential risk for financial instability and can seriously hinder your loan approval chances. From my perspective, it’s crucial to close any online betting accounts before submitting your home loan application and ideally have no transactions on your bank statements for such activity. Lenders prefer to see a clean and responsible financial profile, and the presence of betting accounts can significantly detract from that and do not help build a great consumer profile.
7. Continue to Improve Your Credit Score
Improving your credit score should always be a priority. First thing that lenders look at is your credit score and one of the things that affects your score is multiple applications for credit. If you have 10 or more in the last 24 months, we would recommend that you wait before you apply for a home loan. You can check your credit score at Equifax, this is the same company that most lenders use.
Continue to pay your utility bills and debts on time as these are listed on your credit report, more importantly, try to pay off debts as quickly as possible. I recommend the snowball method: pay off your smallest debts first, then move on to the next smallest, and so on. This approach can help you reduce your overall debt more quickly. Additionally, lenders look at the diversity of your ‘credit mix’, assessing your ability to manage different types of debt responsibly. A diverse and well-managed credit portfolio can positively influence your credit score and improve your chances of loan approval.
By following these tips, I believe you can present yourself as a more reliable borrower, even with impaired credit. Demonstrating financial responsibility, consistent saving, and good debt management are key factors that can help you secure a home loan. Remember, your credit score plays a crucial role in this process, and improving your credit score can make all the difference. If you would like any tips on how to improve your credit or discuss your current situation reach out at startnow@sorenfinancial.com.
