first-home-owners1You 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

Family-budgetWith 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

Supporting Documentation for your home loan interviewWhat 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

mortgage-application-approvedThe 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.

buying 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.