How To Get A Home Loan
In Australia, you must satisfy several prerequisites before a lender deems you suitable for a home loan. However, before reaching that stage, there are key decisions to make and an overarching process to follow.
What's involved in getting a home loan?
Before you start house-hunting, you’ll typically need to:
Understand the eligibility requirements
Get your finances in order
Identify the right home loan for you
Explore pre-approval options
We’ll walk through each step below.
1. Understand the eligibility requirements
Eligibility requirements may differ slightly from lender to lender, but the basic requirements are consistent. The first thing a lender will require is your personal details including:
name
age
address
evidence of citizenship or permanent residency.
Most lenders require borrowers to be at least 18 — although, unless you’re an IT prodigy or a pop star, it’s uncommon to apply before that age anyway.
Age may be a factor in the length of the loan you are seeking, and if you’re older, say in your late 40s or 50s, you may be required to take out a shorter term for your mortgage, meaning higher fortnightly or monthly repayments.
2. Get your finances in order
Next, you will need to provide detailed information about your financial situation to determine your ability to repay the loan over the agreed-upon term. If you are single and applying for a loan in your name only, the process will be simpler than applying jointly.
The lender will also want to know if you have any dependents and your financial commitments, if any, to them. Here are the chief factors the lender will assess:
Your income is important because it will determine how much money you regularly have coming into your account and how much you can therefore afford to borrow. Most of your income likely will be derived from your full-time job, but your income also could include other types of regular payments, such as freelance or casual work, or a side business like online sales or gig work.
The lender will want to see your bank account history to gauge how regular your income is and your ability to repay the mortgage after deducting your monthly expenses, such as groceries, petrol, entertainment, internet, mobile phone, and any existing debts like car loans or credit cards.
If you’ve been renting for a while, a lender may also want to see your rental history to establish a pattern of regular payments.
To establish a pattern of stability, a lender will then want to check your employment history, which usually entails providing payslips and a record of employment from your employer. This step will be more straightforward if you’ve worked in the same full-time role for a number of years rather than frequently changing jobs.
If you are self-employed, your application will be more complicated as you’ll need to provide proof of regular income through bank statements, tax returns and possibly a letter from an accountant.
Finally, your lender will want to see your assets and liabilities. Your assets are basically anything of value that you own, such as money in bank accounts including term deposits and other types of savings accounts, cars or other vehicles, shares, or even stamp and coin collections. Each lender’s definition of assets will differ so it may be in your interest to talk to your lender if you’re unclear about what to include in your loan application.
Liabilities will include any existing loans and credit card debts. When assessing credit cards, lenders consider the full credit limit—not your balance. For example, if your card has a $15,000 limit but only a $500 balance, the lender will still factor in the $15,000. So paying off your credit cards can help lower your liabilities.
3. Identify the right home loan for you
Your financial situation and goals will help you determine which home loan is right for you.
You also will need to understand things like the difference between a home loan and a mortgage — a home loan is the money borrowed to buy property, while a mortgage is the legal agreement that secures the loan against the property.
While owner-occupier is one of the more common types of mortgages, it’s good to understand all your options, including reverse mortgages, lines of credit and construction loans. You also will want to make sure you understand how home loan interest rates work, as well as the difference between fixed-rate and variable loans.
4. Explore pre-approval options
Home loan pre-approval is when a lender agrees to lend you a certain amount of money to purchase a property. Pre-approval gives you, the borrower, the freedom and confidence to put in an offer up to the agreed-upon pre-approved amount. Without this step, you won’t know how much you can borrow.
Before gaining pre-approval, the bank will factor all of the above into account, as well as your credit score, which includes detailed information about your credit history and your debt-to-income ratio (your income compared to your total debts), to determine whether you qualify for a loan.
Before giving final or unconditional approval for a home loan, the lender will determine the value of your desired property based on a range of factors including its size, age, condition, and location, to arrive at a loan-to-value ratio (LVR). If, for example, you wish to buy a property on the market for $500,000, and the bank values it at only $400,000, the lender may decide not to offer you a loan as the collateral may not cover the loan if the property needs to be sold.
The amount you have saved as a deposit, paid upfront toward the total property cost, will also determine how much you need to borrow to buy the property. If your deposit is less than 20% of the total cost of the property, you may have to pay lenders’ mortgage insurance (LMI).
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