Last week we looked at an overview of the home loan process. This week we will have a closer look at the documentation that will be required. Please note the documentation required to support a home loan application will vary depending on the lender, this is just an overview and not a comprehensive list.
Before you can start your home loan application you will need to have a few documents on hand to prove your identity, income, assets and liabilities.
This post will be split into two parts, with this first part looking at the documentation required to support your identity and income. The second part of this post will look at the assets and liabilities.
It is preferrable that you have two of the following:
- driver’s licence; and
- photo identification, such as a university identification card or proof of age card.
If you don’t have two of these, you can also provide one, plus a birth certificate, Medicare card, citizenship certificate or similar documentation. Ensure that you have your marriage certificate handy (if your name is different on other ID’s).
Your income may come from a variety of sources, we will cover off the most common sources of income and the type of documentation that will be required. You will find that some documentation may be acceptable for different types of income e.g. PAYG and Bonus Income.
If you are employed on a full-time basis, this will be fairly easy
- 2 latest payslips (for casual, overtime and work related allowances, these must show YTD income history of 3 months or more); or
- Letter from employer less than 6 weeks old or employment contract which shows employer name and ABN (if applicable), employee name, and current base wage; or
- Tax Return or PAYG Payment Summary (Group Certificate) less than 15 months old; or
- If you have a transaction account with the lender they may accept 3 months of account statements showing salary credits.
Letter(s) from employer or acceptable electronic payslips detailing the bonus amounts received over the past 2 financial years.
- Full financials2 most recent years’ Personal and Business Income Tax Returns, the most recent being no more than 24 months old, and most recent corresponding Notice of Assessment; or
- If your Tax Returns/Notices of Assessment are greater than 24 months old, provide them along with either one of the following:
- internal management accounts supported by Business Activity Statements (BAS) for the past 12 consecutive months verified by the Australian Taxation Office (ATO); or
- current draft or final financial statements prepared by an accountant
Note: Business financials are to be accountant prepared, actual (not draft or extracts) and in full (i.e. trading, profit and loss, balance sheet, etc.)
- Current lease agreement, statement or letter from the managing agent less than 6 weeks old (excluding holiday rental); or
- Transaction statements showing rental deposits for the most recent 3 months (for holiday rental this should be for 12 months); or
- Most recent Tax Return less than 15 months old where rental properties are owned by the applicant.
- Letter from Centrelink no more than 6 weeks old detailing income/benefit.
- 3 months Bank statements confirming regular receipt.
Post Retirement Income
In certain circumstances the lender will require information about your post retirement income. The information required will include:
- the most recent superannuation statement less than 3 months old which includes the amount invested and the indexed pension or annuity being received/ to be received in retirement.
Next week we will continue looking at the supporting doucmentation needed for your assets and liabilities.
You have found your dream home and it is the opportunity of a lifetime. You have to commit today, the real estate agent is telling you about all the other people interested in the property. Buying a property, your future home, is often an emontional decision. It will be a long term commitment, an important financial decision.
Finding your dream home is only one part of the process, do you have the financing in place to make the purchase. Many people do not know or are intimidated by the process involved in getting a home loan.
With a little preparation and organisation the headaches and stress associated with applying for a home loan can be minimised. Here is the five key steps involved in the home loan process.
1. What is your current financial situation
With a little homework you can estimate how much you can borrow and more importantly home much you can afford to spend. When a lender assesses your application for a loan these will be some of the key areas that they will look at:
- Income – including PAYG, self-employed, rental income and income from investments. Depending on the lender some centrelink benefits can be included.
- Your savings – how much have you saved towards the deposit. In some circumstances the lender will want to see Genuine Savings, evidence that you have saved the deposit yourself over a period of time.
- Your current commitments – what other loans do you currently have? Credit cards? How much do you do you owe?
- Credit history – Have you had an issue with paying a bill or meeting your credit card payments in the past. It is important to identify and address any negative credit history before applying for your home loan.
- Living expense – how much do you spend each month? Do you have a budget?
- Guarantors – Is someone (usually your parents) going to guarantee part of the loan, this can affect not only how much you can borrow, but also whether you will need to have Lenders Mortgage Insurance.
Additionally some other factors you need to be aware of when looking at your financial situation include:
- Are you eligible for a First Home Owners Grant (Great Start Grant here in Queensland)?
- Are you eligible for any concessions on stamp duty?
- How much will the Mortgage registration, transfer fees & mortgage stamp duty be?
- Will you have to pay Lenders Mortgage Insurance and if so how much?
- What is the valuation on the property, do you need to get one and if so how much?
- The fees for your solicitor or conveyancer?
- Cost of insurance on the new property?
- How much will it cost to move your belongings into the new property?
All of the factors mentioned above will have a bearing on how much you can afford to borrow. Once you have your borrowing capacity then we can move on to step 2.
2. Getting Pre-Approval for your Loan
Getting pre-approval for your loan is not mandatory, you always have the option to apply for your loan after you find your dream property, getting pre-approved can speed up the loan application process and may make the difference between getting your loan and missing out. Some of the benefits for getting your loan pre-approved include:
- Allows you to go house hunting with the confidence of knowing that the money will be there to complete the purchase
- It can help in negotiations as it shows the real estate agent or vendor that you are serious about doing a deal
- Allows you to act quickly once you find your dream home
- You know the top price you can afford
A note of warning, pre-qualifying for your home loan is not a pre-approval. Even if you have pre-qualified you will still have to go through the normal loan application and approval process which may end up with a lender turning you down. Getting a pre-approval will help take some of the stress and tension out of purchasing your dream home.
3. The Loan Application
What do you need to do to apply for a home loan, while what information you provide at what time will vary for a pre-approval the information that the lender requires to access your application is the same regardless of if you are applying for pre-approval or for the loan.
The loan application involves completing an application form, collecting and supplying required information/documents and signing required forms. So what documents do the lender require to assess your application:
- The loan application itself
- Proof of identity – e.g. Driver’s licence or passport
- Privacy declaration – the lender and other parties will need your permission to access and share your personal information, including your credit history
- Documentation verifying your income and financial situation e.g. Pay slips, bank statements, credit card statements
- Contract for the purchase of the property
The actual documentation required varies from lender to lender, some will want 3 months of bank statements while others will want 6 months of statements. It is important to always check the individual lenders requirements to ensure that you have provided all of the documentation necessary for them to make the assessment.
The lender will make a decision on your application based on their credit policy and procedures. The credit policy and lending procedures are different for each lender, which is why it is important to identify the lender or lenders which best suit your financial circumstances and requirements. All lenders regardless of their individual policy and procedures will look at the following items:
- Credit History – The lender wants to know if you have a history of paying your loan commitments and bills on time and in full or if you have a history of not repaying your debts. For lenders that use credit scoring the smallest black mark on your credit history may be enough to result in your loan application being turned down. It is important to know what is on your credit history prior to making an application and taking steps to address any black marks that you may have accrued prior to making an application.
- Servicability – Is your income sufficient to repay the loan. The government has placed the onus on the lenders to verify that you can repay the loan without enduring substational hardship before approving the loan. The lender will take into account your income, other loan commitments and your living expenses in making this assessment.
- Deposit – How much are you going to contribute towards the purchase. Typically the larger your deposit is the more the lender is prepared to lend you.
- Loan to Valuation Ration (LVR) – this is the ratio of the size of the loan to the property valuation. Lenders will use the LVR to determine, for any given property valuation, how much they are willing to lend.
Generally as part of the assessment process the lender will verify the valuation on the property. Based on the valuation and the size of the loan, the lender may make it a condition of approval that you have Lenders Mortgage Insurance. Note that Lenders Mortgage Insurance is solely there to protect the lender if you default on your payments.
4. The Loan Approval
Yay your loan has been approved, unfortunately there is still a series of steps that have to occur.
- Lenders letter of offer – you will receive a loan offer letter once the lender has approved the loan. This is an important legal document which sets out the conditions that apply to your loan, including the interest rate and term of the loan. You must read this document carefully and ensure that you understand and agree with the contents. If there is anything you do not understand or agree with, you should seek professional advice immediately.
- Lenders loan terms and conditions – attached to the letter of offer the lender will provide you with detailed loan terms and conditions. This is another important legal document as it sets out the obligations for you and the lender. Again you must read this document carefully and seek professional advice if you are unclear about any of the terms and conditions.
- Accepting the loan offer – If you are happy to proceed with the loan, you should arrange to sign and return the loan documents. Remember this is a legaly binding document, please ensure that you seek professional advice for anything you don’t understand before you sign any document.
- Arranging mortgage over your property
- The mortgage is a legal mechanism which provides the lender with rights over your property (security) in the eventuality that you fail to meet your obiligations under the loan contract.
- Particularly is you fail to meet your loan repayments, the lend has an exhaustive process which they follow to ensure the repayment of the loan balance. Which includes as a last resort, the lender can selling your property to meet the loan obligation.
- Once the loan offer documents have been signed, the lender will commence the process to take a mortgage over your property. The lender will liaise with your solicitor or conveyancer while arranging the mortgage.
- The process will typically include title searches to ensure that you are or will become the rightful owner of the property. This process is handled between the lender and your solicitor or conveyancer.
The final stage of the home loan process is settlement of the loan. The settlement process is when your lender meets with the seller’s and your legal and banking representatives to finalise the purchase of your property for you.
Prior to settlement you will have an opportunity to do a final inspection of the property. It is reconmended that you either undertake the final inspection yourself or engage a professional to do it on your behalf, either way it is highly recommended that you have a final inspection prior to settlement. Some of the things to consider during the inspection:
- Appliances, hot water system, airconditioner etc are in working order
- The structure, walls, light fittings, window and floor coverings are in the same condition as when you inspected the property previously
- Locks, keys and automatic garage door controls are supplied and all working properly
- If you’re building a new home, make sure all the work is finished and appliances installed and working. You might want to organise a defects inspection by a building inspector.
On settlement day, your solicitor or conveyancer will meet with your lender and the seller’s representative, at an agreed time and place, to sign and hand over documents and cheques. The documentation is then sent to the titles office to register you as the new owner.
Your lender will do the following:
- register a mortgage against the title of the property which stays in place until you pay off the loan.
- provide the funds to purchase the property.
Your solicitor or conveyancer will ensure that:
- any existing mortgage is paid off
- any caveats (notice on the title that a third party has an interest or right in the property) are removed
- all clauses on the sales contract are fulfilled
- the transfer of land and mortgage is registered with the title office
Your solicitor or conveyancer will then contact you to let you know that settlement has been successfully completed.
Within a few days, your lender will generally send a letter confirming the transaction details. It is important to follow up anything that you think may not be correct immediately. Your new loan account should be available within one day and depending on the features of the loan you will be able to access it through the internet, telephone, or ATMs, so it is a good idea to log on and make sure that everything is working appropriately.
All that is left is for you to unpack your belongings and to settle in to your new home.
Over the comming weeks I will be looking at the various components in more detail, for example what documentation is required or what exactly is Lenders Mortgage Insurance or how the process differs if you are refiancing as opposed to purchasing a property. If there is anything in particular you would like me to explore or explain in depth please leave a comment below.
The home loan market is becoming significantly more complex and there is an every increase number of loan products available from the numerous banks, building societies, credit unions and non-bank lenders.
Fixed rate, split loans, Honeymoon period, this one has a credit card, variable rate, break costs, comparison rates, this one has an offset account, FHOG, defered establishment fees, what does LVR mean…
Using a good finance broker has a number of benefits, with Peace of Mind being a main one.
A finance broker will provide you with professional advice, genuine choice and personal service in finding you a financal solution which will meet your needs.
Some of the other benefits that a good finance broker will provide you include:
Save you time
You can choose to research the various lenders and their products yourself, looking for just the right loan or work with a credit adviser who already has that knowledge. Saving you time and stress. A finance broker will assist you with selecting a loan, completing the application and lodging the supporting documentation with your selected lender.
Give you choice while helping you find the right loan
A finance broker will be accredited with a number of Lenders from which they recommend a loan. This provides a finance broker with access to 100’s of loan products. This allows the finance broker to provide you with 2 or 3 products to choose from, including a reconmendation of a solution which is right for you.
The best loan for you is not necessarily the one with the cheapest rate. A good finance broker will have an understanding of your current circumstances and future plans and will recommend a loan that best meets your needs. Having the appropriate loan for your circumstances can save you money in the longer term which can help you build wealth.
Help you avoid pitfalls
Best not judge a book by it’s cover
Unfortunately there are many products that appear at first to offer a great deal but they have penalties, fees or charges you are not aware of; they may not offer the flexibility you require in the future, or they may not have the features you require. A finance broker can help you avoid taking out a loan you might later regret and in the process potentially save you a lot of money in bank fees and additional repayments over the life of the loan.
A good finance broker is there to support you over the life of the loan. They will be available to regularly review your loan or to answer any questions you may have.
New Years Day 2015
With the start of a new year it is always a good time to reflect on what your goals and aspirations are for the comming year. I don’t like the term resolution, New Year’s or at other times, why you ask?
A resolution is definite “I will achieve this”, a very black and white outcome, you either do or fail to do your resolution there is no other outcome. A goal on the otherhand is something you are working towards, each small steps to achieving your goal is a win. More importantly our goals are not set in stone they can change as life and our priorities change.
My goals and priorities changed dramatically when my son, JJ, was born in 2013. I changed from a corporate career path to being a small business owner, I went from a career in the Mining Industry to Finance and Mortgage Broking, my goals and priorities had changed. One of my goals now is to be able to provide for my family while having the flexibility to spend the morning watching my son’s swimming or taking him for an afternoon walk in the park.
Over time our goals and priorities change. You may start with a goal to loose some weight, to achieve that you started walking a couple of days a week, then jogging for a minute or two during your walks and before you know it the original goal has been achieved and a new goal of jogging 5km’s has shown up.
We all have our goals, and we need to review them regularly. Some of the questions I ask myself include:
- Where am I in achieving this goal
- What is the next step or action I have to take in achieving this goal
- If I have achieved this goal, is there a bigger goal I want to achieve
- Is this goal still a priority, if not let it go
- Is there something new that I want to achieve, if so what is the first step I have to take in achieving it
As always the New Year is always a good time to review your goals. For myself two of my goals for 2015 are:
- Writing this blog and in the process informing and helping my readers
- Growing my business and in the process help my clients achieve their financial goals, whether it is the purchase of the their dream home or releasing equity in their home for that overseas holiday or working out what deposit a first time home owner will need and how they can achieve it
What are your goals, your dreams and more importantly what is the next step you have to take so that you can move towards achieving that goal. Please leave a comment below.
The best thing about goals has to be achieving them, seeing the dream come true. I am currently sitting alongside the local pool watching my son have a swim while I write this post.