You have found your dream home, you (or your broker) have completed the application and you have provided all of the relevant documentation to support the application. What now? How does your preferred lender assess your application, how do they make the decision to lend you the funds required so you can buy that dream home?
There are 5 main areas that the lender will look at when assessing your loan application. Depending on an individual lender’s credit policy will dictate how they assess each of these areas or if there are other areas that will be assessed. Note this is only a guide and what can and will be assessed will vary.
- Servicability – your ability to repay the loan
- Deposit – how much of your own funds will be used to fund the purchase
- Security – what is the value of the property you are borrowing against
- Credit history – your financial history and credit rating
- Current expenses and debts – how much do you spend each month and how much do you already owe.
Based on the assessment of each of these criteria a lender will deciede to either approve your applicaiton, approve it with conditions or reject the loan.
A major consideration for the lender is whether or not you have the capacity to repay the loan. Additionally the government put the onus on those providing credit advice and assessing applications to ensure that you are not put into a situation which cause servere hardship. To that end the lender will look at your monthly income, wealth, monthly expenses, lifestyles, and employment history.
Having a solid deposit improves your application success chances by showing you are prudent with your finances and capable of saving and helps in your position to secure the best rates possible. The larger your deposit you make the lower the LVR of the loan, which lowers the risk to the lender. Additionally when lenders assess applications with high LVR’s they will be looking for proof of genuine savings, they will want to see that you have saved at least 5% of the deposit.
The property you are purchasing will be used as security against repayment of the loan. As we have disccussed in previous posts the size of the loan to the value of the property provides the LVR. At LVR’s over 80% the lender will require either LMI (Lenders Mortgage Insurance) or additional security to reduce the risk to the lender if you cannot meet your repayments.
Your credit history will typically include loan enquiries made in the past five years for household, personal or family purposes or to purchase, re-finance or renovate a residential investment property, or where you have gone guarantor for someone else with respect to consumer credit. It will also include details of any debts including serious credit infringements and debts that are overdue by 60 days or more.
The lender will use your credit history to assess the likeily-hood that you will default on your loan repayments.
Current Expenses and Debts
While both your current living expenses and debts will have been taken into account when determining if you can service the proposed loan, your expenses and debt provide the lender another area where they can assess how you manage finances and therefore the risk to them in lending the money to you.
For example if you spend all of your income each month and have significant consumer debt (ie personal loans, credit card and store card debt), this will potentially affect your chances of getting your loan.
The key is to ensure that you are open and upfront with your lender and/or credit advisor. When they assess your loan there may be a number of possible outcomes, from approval to rejection. The loan may be approved with conditions or given your circumstances it may not meet that lenders credit policy, but it could potential fit with another lender.
The important point is to understand what your lender is looking for and to make it as easy as possible for them to say YES. It may mean that you have to spend 6 months or a year getting your personal finances in order, showing that you can and will meet your obligations.
Next week will we have a closer look at credit reporting, and what could be on your credit history.
Control your home loan, rather than let it control you
Proactively managing your home loan can help you navigate through a potentially difficult and stressful environment.
With the price of the average home seemingly beyond reach, most would-be home buyers feel like the odds are stacked against them when it comes to purchasing a home.
Buying your first home or investment property is still possible – all it takes is a little time, home loan know-how and the commitment to managing your finances.
So what does this mean for you and your home loan? There are a range of different home loan products now available from numerous lenders, indeed there are a number of differing products often available from a single lender. Switching products to better suit your financial situation, could potentially save thousands of dollars in interest repayments and take years off the life of your loan.
For example, you may want to switch to a lower variable-rate home loan with fewer features, or lock into a fixed-rate home loan where you’ve got certainty in repayments each month. Breaking the terms of your current home loan can be expensive however, so you’ll need to check that you’ll come out ahead when all costs are considered.
Moreover, if you have other debts that are impacting on your ability to meet your home loan commitments, you may even consider consolidating all your debts into one easy monthly repayment.
Consolidating debts, such as credit cards or personal loans, into your home loan can mean paying an overall lower interest rate, and also in turn help improve your cash flow. Please note however that in effect you are spreading short term debt over 20 or 25 years.
And cash flow is an important consideration when it comes to your home loan. While it can be a very effective strategy, refinancing your home loan is not the only option that’s available.
A number of simple tactics can help you against significant changes to your financial situation. These include
- Setting a budget: Work out your expenses, fortnightly or monthly, and factor in your home loan repayments and other commitments. You might need to cut back on spending in places to make sure your home loan is a priority. Keep a diary of your spending and stick to your budget.
- Cutting your debt: Reduce the number of credit cards you have (ideally down to one) and their credit limits, and only use them sparingly. Having a home loan means taking control of your spending.
- Arranging a direct debit: Arrange for your home loan repayments to be direct debited from your pay, so you always make them on time.
Remember, if you feel you’re struggling to meet home loan commitments it’s best to act now, rather than let the problem spiral out of control.
Continuing our look into the Home Loan process, this week we are going to have a look at Home Loan Pre-Approvals. What are pre-approvals, how do you apply, why and when would you use them?
What are Home Loan Pre-Approvals?
The Home Loan Pre-Approval means that your Lender has given you a conditional approval or an approval ‘in principle’ prior to purchase. Although subject to terms and conditions, a pre-approval basically gives you the green light on your home loan while you are still looking for your dream home. That way when you find your perfect place you’ll able to make an offer with confidence.
How to apply for a Home Loan Pre-Approval?
The application process for a Home Loan Pre-Approval with most lenders is the same as if you were making a normal application for a home loan. The lender will do a complete credit assessment, including confirming your income and commitments. This helps them understand your ability to repay the loan.
The Home Loan Pre-Approval is normal conditionally approved or approved ‘in-principle’ and the approval can be valid for periods of 3 to 6 months, and some lenders have processes in place to renew the application after the initial period if you have not found your dream home. The main condition attached to the approval will be subject to valuation, once you have found your dream home, the lender will check the value of the property and the LVR of the loan to ensure it still meets their lending requirements. Usually at this point the lender will also reconfirm your income and check that there has been no significant changes from your original application.
Once the lender ticks those final boxes, you will receive your unconditional approval and the next step is settlement. Depending on the type of valuation and checks the lender has to do, unconditional approval may be received anywhere from a couple of hours to 2-3 days.
Why get a Home Loan Pre-Approval?
Some of the benefits for getting your loan pre-approved include:
- Peace of Mind – You know how much you can borrow and this will take some of the stress out of buying a property.
- Jump the Queue – Being pre-approved means you can act quickly when you find the property you want.
- Stronger Bargaining Position – A pre-approval sometimes will allow you to negotiate a better purchase price from the seller, especially if you can have fewer stringent conditions in the contract of sale.
- No Cost to you – Besides some time in completing the application, their is no cost to you if you don’t proceed with the loan.
When should you get a Home Loan Pre-Approval?
For peace of mind and the added security of knowing that your lender has approved you to borrow a set amount, there is no reason not to get a pre-approval for just about any property purchase. Whether you are a First Home Buyer, looking for your next home or maybe it is an investment property, being Pre-Approved does not require anything extra from the normal approval process and often will speed the purchase process up.
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.