You are a first home buyer and you don’t know where to start. You’re doing your research and would like to understand the home loan application process. Your primary goal is to make sure that when you begin the application with your broker, the probability of getting your loan approved is high.
Knowing how lenders will assess your loan application will help you make a decision on whether it’s time for you to begin the home loan process.
When lenders assess a home loan application, they are always assessing their risk. The lower the risk, the more comfortable they are in giving you the loan. Here are some key measures lenders use to assess your risk as a client. Knowing what information lenders are looking for means you are more likely to get a loan approved the first time around.
Income and employment history
Your income determines your borrowing capacity, though income alone will not get you the loan. Lenders will assess you on the stability of your income. This includes employment type (permanent, casual, contract), how long you have been with an employer and the industry you work in.
If you just started a new job, you will need to provide at least two years’ history to demonstrate a stable income over a longer period. If you’re a self employed client, there’s usually a bit more work that has to go into preparing your loan. As a sole trader, you need to provide your tax returns and as a company, you need to provide the company tax returns and your personal tax returns. These are generally more scrutinised when being assessed by a bank, so there could be more work involved in preparing for these applications.
You have to remember that bigger is better when it comes to home loan deposits. Most lenders will be happy if you have the 20% deposit. This avoids you from paying loan mortgage insurance. But if you only have a 5% deposit, then you have to prove that the deposit is genuinely saved. It is important to show that you have saved your deposit over a period of time (at least three months). Regular and consistent deposits into a savings account make a good case for being able to pay off a loan.
What if a family member provides you with a 5% deposit as a gift and that money has not been sitting in your account for at least three months? What if you find a reasonably priced property that you think you can afford? If you have been renting for the last 12 months, there are major lenders in the market who will consider rental history as proof of genuine savings. These lenders recognise the difficulty of you paying rent and saving at the same time. You only need to provide a tenant’s ledger showing 12 months of rent history.
First home buyers with no deposit can use their Mum and Dad to assist. Mum and Dad have their home fully paid or may have a little mortgage left on it. The equity that their home has built can be used to fund the 20% of the purchase of their kids. The kids though have to prove that they can afford the full 100% of the loan.
Credit conduct or history
It is important that your credit history and your conduct in paying bills and loan commitments are impeccable. As major banks tighten serviceability requirements, most lenders now want to see copies of credit card and personal loan statements. They want to see bills paid on time and staying within credit card limits. Any statement containing “default, late payment or overdue” will not be looked at kindly. Lenders also score applicants on their existing credit facilities and how they use them.
It’s a complex part of the process and a mortgage broker can help by understanding your credit situation. Before you make a home loan application, pay a small fee and check your credit report. The credit report will help you uncover any prior defaults or unpaid bills you may not be aware of. It’s important to have these cleared before an application is submitted.
The Australian property market
There has been a pick-up in first home buyer activity in the last seven months ever since NSW and Victoria have released their first home buyer incentives. As investor demand continues to weaken and housing prices continue to cool down, more of the first home buyers are getting into the market. The Reserve Bank of Australia has left interest rates unchanged at 1.5% and is not expected to go up anytime soon.
This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
Maria Papa is a senior finance expert specialising in home loans, investment loans, self-employed loans, Lo Doc loans, car loans, personal loans and loan protection. She has offices in Sydney and Melbourne. If you have questions, call Maria at 0430 144 008 or email her at firstname.lastname@example.org