How do lenders assess your loan application?

27 Mar 2015 | Home Loans

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?

Lending Assessment

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.

1. Servicability – your ability to repay the loan
2. Deposit – how much of your own funds will be used to fund the purchase
3. Security – what is the value of the property you are borrowing against
4. Credit history – your financial history and credit rating
5. 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.

Servicability

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.

Deposit

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.

Security

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.

Credit History

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.

Getting Pre-Approved for your Home Loan

6 Mar 2015 | Home Loans

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:

1. Peace of Mind – You know how much you can borrow and this will take some of the stress out of buying a property.
2. Jump the Queue – Being pre-approved means you can act quickly when you find the property you want.
3. 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.
4. 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.

Cautionary Note

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.

Buying a home – the other costs

27 Feb 2015 | Home Loans

Continuing our look at the Home Loan Process, this week we are going to look at the range of costs that are invloved with purchasing your new home and arranging finance.  It is quite possible that the Other Costs can end up being 5% to 10% of the property value.  The costs can be broken down into 3 main categories, Government costs, Home Financing costs and additional costs.

Government Costs

There are a number of Government Costs that are payable:

1. Registration of mortgage – One off fee payable to the land titles office to register the mortgage.
2. Registration of transfer – Once off fee charged by the State Government to cover transfer of the title of your new property.
3. Stamp Duty – Stamp (or Transfer) duty is a levy (or tax) charged by the State Government for legally recognising certain documents.
4. Land Tax – State governemts charge a tax based on the value of the land.

The costs assoicated with each of these charges varies depending on which state (or territory) the property or land is located.

Financing Costs

There are a number of fee’s and charges that your lender will charge in relation to providing a home loan.

1. Loan Establishment Fee – This is a one-off upfront cost to establish your loan.
2. Settlement Fee – One off upfront fee is payable when the Bank (or its representative) arranges the funding of a loan (regardless of whether or not we attend settlement) for a property purchase, or for the refinance of an existing loan that’s with another lender.
3. Rate Lock Fee – A fee paid by fixed rate borrowers on application for a mortgage. By paying a rate lock fee, your rate will be locked at application, instead of the normal practice of the rate being set at settlement.  Protects the borrower from a rate increase between the application being submitted and the loan being finalised.
4. Security Guarantee Fee – this is a charge in relation to having a guarantor putting up security for your loan.
5. Addition security fee – This fee is charged when you have more than one security for the loan (guarantee securities are excluded from this fee)
6. Home Loan Exit Fee – A fee payable for you to exit your home loan agreement, often charged when you repay the loan within a certain period after establishing the loan (e.g 2 years)
7. Lender’s Mortgage Insurance (LMI) – As discussed here LMI is typically charged when the LVR is greater than 80%.  There are special circumstances when LMI is charged at lower LVR’s (often for low doc loans) or at higher LVR’s (some lenders have special policies for some professions, eg doctors).
8. Valuation fee – some lenders will charge a fee to get a valuation on the property being purchased (and additional fees for any additional properties being used as security).
9. Document Preparation / Legal Fees – some lenders will charge a fee for preparing the loan documents and for any legal fees that they may incur in providing the loan.
10. Professional Package – offered by some lenders, this is an annual fee for the life of the loan, but often allows the borrower access to discounted interest rates, annual fee free credit cards, discounts on insurance and other products offered by the lender.

The financing costs will vary depending on the lender being used, which fees are charged and the amount being charged varies with each lender.  Often some of the fees will be waived during special offers or can be negotiated to be removed.  Options like the professional package add an annual fee, but will have fees like establishment fees waived as part of the package.

If you are refinancing an existing loan, it is important to find out from your current lender the costs associated with paying out the loan.  This is doublely important if you currently have a fixed rate loan.  It is often wise when talking to your lender to tell them you are currently considering selling your current home and you want the current payout figure for your loan for your budget.

Other Property Costs

There are a number of other costs that you may incur when purchasing a new property.

1. Solicitor/Conveyancor Fee – for the preparing/checking the legal document and providing legal advice around the property transaction.  Usually will also perform the title search for the property.  They will normally calculate how the funds will be disbursed, including costs like Council Rates which have been prepaid by the seller.
2. Building / Pest report – Examine the property and report on any problems, maintenance needs and pest found (like termites).
3. Council Building Inspection – to check the structure of your building
4. Building Insurance – The cost to insure your property. Ongoing cost on a monthly/annual basis.  Should be put in place once the contract of sale documents have been exchanged (or the cooling off period has finished).
5. Contents Insurce – the cost to insure the contents in your new home. Ongoing cost on a monthly/annual basis.  Should be put into place prior to moving into your new home.
6. Strata levies – if your property is on a strata title, there will be Body Corporate Fee which covers maintenance and upkeep of the common areas, and often will incorporate the building insurance.  Your Solicitor/Conveyancor will make adjustments for the first payment.  This will be ongoing usually on a quarterly basis.
7. Council Rates – your share of the rates from the date of settlement.  Usually paid quarterly or annually. Your Solicitor/Conveyancor will make adjustments for the first payment.
8. Utilities/Services – You will have pay a connection fee to get your utilities and services connected to your new home.  This may include electricity, water, gas, telephone, internet and pay tv.
9. Removalists costs – The cost of moving your belongings from your current residence into your new property.  This may include engaging a professional removalists or hiring a van and doing it yourself.

There are a number of costs that you need to take into account when purchasing your new home outside of the direct cost of purchasing the property.  It is highly reconmended that you set up a budget and put down an estimate of what the costs will be.  This will be useful information for you to have when determining how much you can afford to pay for your new property.