Covering some basic concepts

13 Feb 2015 | Home Loans

Before we continue with our in depth look at the Home Loan process there is some important concepts which I want to cover off.  Today we are going to have a look at Loan to Value Ratio (LVR), Lenders Mortgage Insurance (LMI), Genuine Savings and Guarantees.  I would like to stress again that each Lender is different and how they apply each of these items will vary depending on their credit policy.

Loan to Value Ratio (LVR)

Loan to Value Ratio or LVR is one of the most basic concepts relating to home loans.  The LVR is the amount of a loan as a percentage of the value of the asset it was used to buy and is calculated by dividing the loan amount by the value of the asset.

For example you have a house valued at $500,000 and you have $100,000 in cash for the deposit, then the loan amount you are looking to borrow is $400,000. Your LVR is calculated as follows:

$400,000 (loan amount required) / $500,000 (value of house) = 0.8 or 80% LVR

The higher the LVR the higher the risk for the lender.  Each lender’s credit policy will cover up to what LVR they are willing to lend, depending on the type of loan product or loan purpose that is being applied for. For example for a standard home loan a lender may lend up to 95% of the property value, but for a low document loan they may only lend 70% of the property value.

Standard practice for LVR’s over 80% is for Lenders to require Lenders Mortgage Insurance, which leads us to the next topic.

Lenders Mortgage Insurance (LMI)

Lenders mortgage insurance (LMI) protects a lender against financial loss if you default on your home loan and the property is subsequently repossessed and sold.  The LMI covers the amount left to pay on the loan if the amount recouped from the sale of the property is not enough to pay off the loan in full to the lender.  Note that LMI protects only the lender not you the borrower from loss.

LMI allows borrowers to obtain a loan that would otherwise not be available, or to obtain a loan much sooner than they would be able to if they had to save for a larger (more than 20 per cent) deposit.  Some of the key points for LMI include:

• LMI premimum is payable at settlement. It may be included in the loan amount borrowed or paid upfront.
• The costs of the LMI premimum will vary based on the size of the loan and the size of the deposit.
• It is not possible to transfer LMI between lenders, if you refinance your loan with a new lender you may have to pay a new LMI premimum
• If the LMI insurer has had to pay your lender an amount in accordance with the LMI policy, the insurer may then attempt to recoup that sum directly from you the borrower.

It us usual practice that Lenders will require LMI on loans with a LVR greater than 80%.

Genuine Savings

With high LVR’s, typically over 85%, a lender will require the borrower to show genuine savings.  This means borrower must show evidence of regular savings over a defined period, usually at least 3 months.  The lenders are looking for evidence that the borrower will be able to meet there loan repayment commitments when they fall due.

The types of genuine savings that can be typically accepted include:

• A savings pattern, e.g. regular deposits into a savings account
• Term Deposits
• Shares
• Gift
• Equity in an existing property
• Inheritance

The following type of savings are typically not acceptable forms of genuine savings

• First home owners grant
• Borrowed funds
• Sale of assets other than property (e.g. Motor vehicles)

Each lender will have their own requirements around Genuine Savings and what is acceptable as genuine savings and what is not.

Guarantee

A guarantee can give you a head start by making it easier for you to get into your home faster with the help from family members or others willing to assist.  A guarantee allows another person, generally a family member to use the equity in their home as additional security for a portion of your loan amount. This means you may be able to buy a property sooner, and avoid having to pay the LMI premium.

The features of Guarantees include

• Buy your own property sooner
• Avoid paying the premium for LMI
• Maximise the amount you can borrow (in some cases up to 100% of the purchase price)
• Guarantors will generally be family members (typically parents), however lenders will often consider other guarantors and determine if a security guarantee may be acceptable
• Guarantors can determine what portion of the loan they will secure.  Normally the guarantor will secure up to 20% of the loan amount.

Next week we will continue our look at the home loan process with an overview of the First Home Owners Grant and some of the other costs that you are likely to encounter

Documents Required for a Home Loan Application – Part 2

6 Feb 2015 | Home Loans

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.

Last week we started looking at the documentation required around verifying your identity and income.  This week we will have a closer look at the documentation that will be required to support your assets and liabilities.  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.

Assets

You will need to prove your savings with bank statements, as well as be able to provide details and values of any other assets, such as cars, stock, term deposits and property.

Savings/Equity

The savings/equity must be held in the name of the borrower(s) and can include any of the following:

• Savings account(s)
• Term Deposit(s)
• Cash Management Account(s)
• Share
• Equity in existing residential property

In some cases Genuine Savings has to be demonstrated (don’t panic we will explore genuine savings and other concepts further in future posts).  As a result the folowing may also be required:

• Statements or other records to show that you have held or accumulated the savings or equity over 3 months or more
• If the savings is a gift for example from your parents they will be required to provide a Statutory Declaration stating that the funds are a gift and you do not need to repay the money in the future.

Transaction Account

A transaction account is your main day to day banking account it is usually defined as the account that your salary is paid into and / or your main banking transactions occur. You may have more than one transaction account, for example your salary may go into one account, but you use a different account to pay your bills.

Depending on the lender you may have to provide between 1 month and 6 months of statements and for some lenders if you bank with them you will not be required to provide any statements.

Other Assets

Generally you will not be required to provide documents supporting your other assets, you would just list them off and provide an estimate of there valuation.  In some cases you may need to provide supporting evidence as to the ownership and value of an asset, particularly if you are using the asset to provide security for the loan.

Liabilities

Lenders assess you on your ability to make your future repayments and need to understand what your regular expenses are to ensure you can meet your obligations without financial hardship.

Existing Loan / Debt

The lender will be looking for supporting documentation to verify your any loans or debt that you currently have, this could include loans on other residential properties, credit or store cards, personal loans or equipment finance.  The type of supporting documents will include

• Current statements covering six months for mortgage related loans being refinanced
• Current statements covering three months for non mortgage debts being refinanced (e.g. Credit/store/charge cards, equipment finance or personal loans etc).
• Current statements covering one month for any limit facility not being refinanced (e.g. lines of credit, credit/store/charge cards, margin loans, etc)
• Current statements covering one month for any fixed debt/commitment not being refinanced (only required where the repayments cannot be verified through the transaction statements)

Living Expenses / Commitments

What are your day to day living expenses, this is usually best demonstrated by a family budget supported by statements for your transaction account(s) and credit cards.  Other regular expenses and commitments may include:

• Ongoing rental, board or living at home arrangements (for example where you are purchasing an investment property and plan to remain in your current living arrangements) – where the payments cannot be verified by the most recent transaction or credit card statements one of the following should be provided:
  • Statement or letter from the managing agent
  • Current lease agreement
  • Letter from parents confirming that applicant resides in their property and does not pay any rent or board if applicant is living at home and not paying rent or board.
  • Proof of rental or board payments from Bank records
  • Letter from parents or related family member if rent or board is being paid to a related family member
• Child maintenance – supported by Family Law Court order and bank statements or pay slip showing the payments
• Centrelink debt – supported by Centrelink statement and bank statements or pay slip showing the payments
• Court ruled debt – supported by Court order and bank statements or pay slip showing the payments
• Australian Tax Office debt – Correspondence with ATO showing repayment schedule and bank statements or pay slip showing the payments

Next week we will look at some of the additional documentation needed in particular circumstances, for example construction loans, first home owners grants or with guarantors.

Documents Required for a Home Loan Application

30 Jan 2015 | Home Loans

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.

Identity

It is preferrable that you have two of the following:

• passport;
• 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).

Income

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.

PAYG

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.

Bonus Income

Letter(s) from employer or acceptable electronic payslips detailing the bonus amounts received over the past 2 financial years.

Self-Employed

• 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.) 

Rental Income

• 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.

Centrelink Income

• 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.

The Home Loan Process

23 Jan 2015 | Home Loans

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:

1. Income – including PAYG, self-employed, rental income and income from investments.  Depending on the lender some centrelink benefits can be included.
2. 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.
3. Your current commitments – what other loans do you currently have? Credit cards? How much do you do you owe?
4. 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.
5. Living expense – how much do you spend each month? Do you have a budget?
6. 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:

1. Allows you to go house hunting with the confidence of knowing that the money will be there to complete the purchase
2. It can help in negotiations as it shows the real estate agent or vendor that you are serious about doing a deal
3. Allows you to act quickly once you find your dream home
4. 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:

1. The loan application itself
2. Proof of identity – e.g. Driver’s licence or passport
3. Privacy declaration – the lender and other parties will need your permission to access and share your personal information, including your credit history
4. Documentation verifying your income and financial situation e.g. Pay slips, bank statements, credit card statements
5. 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.

1. 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.
2. 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.
3. 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.
4. 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.

5. Settlement

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.