Buying? Do You Understand The Home Loan Process?
Getting a home loan can seem like a complex process, but it doesn’t have to be. Here is a summary of what lenders are looking for and why, and a look at the most common steps; from applying for a home loan all the way through to settlement and beyond.
As a buyer, starting the home loan process early is a good idea. Having an understanding of your budget can help with narrowing down your house hunting to properties within your price range. Plus, if you obtain a written pre-approval it can give you a significant advantage over other buyers as you’re able to act quickly and decisively when you find the right property, rather than having to scramble to get your finances in order.
What are lenders looking for?
Lenders like lending money, that’s the business they are in. But they also have a responsibility to their stakeholders to offer loans to people who they believe will be able to re-pay the loan back in full. It is their business to reduce the risk of borrowers defaulting on their loans. Whilst it may seem like they are making you jump through hoops when you apply for a home loan, the other way to look at it is they are also trying to protect you from being in a position where you are in over your head and unable to re-pay your loan back. No one wants this scenario.
In order to assess a borrower’s security of the loan, they look at a mix of the following elements:
- Your ability to repay the loan
- How they assess your track record for repaying previous loans
- Your employment history
- Your income
- How much you can afford to repay each month
How does a lender calculate a buyers borrowing capacity?
A lender will calculate your loan to value ratio (LVR) to determine your borrowing capacity. The LVR is the ratio of money borrowed to the amount of security given (the value of the property), expressed as a percentage.
For example, if you borrow $400,000 and the property is worth $950,000 then your LVR is:
400,000 / 950,000 x 100 = 42%
The majority of lenders prefer to lend to borrowers whose LVR is at least 80%. The remaining 20% would then come from the home buyers by way of savings or possibly from a security guarantee from another property. In most cases if you want to borrow more than 80% of the property’s value you may be charged Lenders Mortgage Insurance (LMI). What this covers is, if the buyer is unable to pay back the loan and the lender was forced to sell the property, LMI covers the shortfall between the property sale price and how much is still outstanding on the loan.
What are the steps to getting a home loan?
Step 1 - Get your financial documents in order
Lenders will want to know about your financial situation. This means they will need to know your income, your assets, your expenses and your liabilities. Lenders will also want to know about the property you are buying to determine if they feel comfortable accepting it as the security on a home loan.
Getting the following documents and paperwork in order before you put your application in can help make the process run a whole lot smoother:
- Evidence of your salary - in most cases you will need to show the 2 most recent pay slips and the previous 2 years group certificates
- If you’re self-employed, you’ll need to show your last two tax returns including Notice of Assessments
- Details of any investment income from shares or property
Details of the assets you own including:
- Savings accounts, Term deposits
- Life insurance
- Other assets such as cars
Details of your monthly expenses including:
- Groceries, Utilities, Transport
- Education, childcare
- Child support payments
- Medical & Health
- Telephone, Internet, Pay TV & Streaming services
- Clothing & Personal Care
- Recreation & Entertainment
Details of any debts you have such as:
- Car loans
- HECS/HELP Debt
- Personal loans
- Credit and charge card limits
- Other home loans
Step 2 - Talk to a Home Loan Broker
Now you have your paperwork in order it’s the time to talk to a home loan broker like the team at Oxygen Home Loans. They can help you work out how much you can borrow and search for the right loan for you. We understand what you need and will find the most suitable loan for you and your circumstances - it may be with your current bank or it may not be.
A broker service is free, and it’s worth it. It can save you hours of doing your own comparisons on lending rates and mortgage types. Plus, a broker can simplify the mortgage jargon. We can also help with all the paperwork. Because we’re constantly working with lenders, we know what documents they need, and we’ll make sure your approval process goes as smoothly as possible.
Step 3 - Home loan application is processed
Every personal circumstance is different so it’s not always easy to tell how long an application will take to process. It can also depend on your credit rating and financial history, and whether or not additional information is required - this is sometimes the case if you are self-employed or taking out a joint mortgage with someone else.
A broker will ensure all the paperwork is in order before it’s submitted, and keep following up with the lender. We’ll also keep you informed of how your application is progressing, every step of the way.
Step 4 - Home loan pre-approval
Once your paperwork is submitted, and all is in order with the lender’s requirements, your application will move to the pre-approval stage. This is when a lender will give you an indication that pending further documentation and review, they would be prepared to lend you a certain amount of money. This gives you a good idea of your borrowing power and therefore an indicative price you can use when house hunting.
If you are house hunting, having written pre-approval can give you an edge over other buyers as it means you can move quickly if you want to put an offer on a property or should you be the winning bidder at an auction.
However, pre-approval is not a binding agreement between you and the lender, they are only indicating they are willing to lend you this money assuming your documentation is in order and your circumstances don’t change. A pre-approval is valid for 90 days after which can be updated with additional financial information with some lenders.
Step 5 - You’ve bought a property and need to pay the deposit
If you’re the successful bidder at auction or your offer has been accepted for a private sale, when you sign and swap the contracts you will be required to pay a deposit. This is normally 10% and will be held in trust by the real estate agent or your conveyancer until settlement.
As the buyer, you need to make sure you have your funds available to make a bank transfer or bank cheque for the deposit amount at this time.
To find out more about contracts and settlement click here.
Step 6 - Home loan final approval
Following pre-approval, before your lender gives final approval, they will want to see the signed contract of sale and conduct a property valuation if one hasn’t already been done by the lender. This is important as it will help the lender determine the final amount they are willing to lend you for the property.
They will also do credit checks and may request further documentation along with building insurance.
Once all of the lenders credit requirements are satisfied, they will send you a Loan Offer document for review and signing. Spending time looking over this carefully is important as it is a legally binding document and you need to make sure you understand the loan and terms that you are agreeing to. It is recommended you seek independent legal and financial advice.
Step 7 - Property settlement and full payment to be made
This is the final stage of buying a home and is when the lender funding your home loan transfers final payment to the vendor. The home loan will be registered against the property title and the property is officially yours.
To ensure you are ready for settlement, you need to make sure all your finances are in order and you have enough money to cover all the settlement costs including any shortfall between the home loan amount and the costs at settlement. These costs include any stamp duty payable, legal or conveyancing fees, application fees, settlement fees and registration fees for the title and mortgage.
Step 8 - Home loan repayments start
Now you own the property, you need to settle into the regular home loan repayments as per your home loan contract. Budgeting for this each month is a good idea particularly at the beginning so you get used to the repayments.
Hopefully everything runs smoothly here and you’re able to budget and plan for the repayments each month, but if you’re having trouble hitting your payment deadline, contact your lender before you have missed a payment and talk to them about repayment options available to you. They want you to be able to pay your loan back so they will normally try to work with you on plan.
Step 9 - Reviewing your loan and refinancing
Life is unpredictable. So, if your personal circumstances change, you decide to renovate, or if interest rates move substantially you might find yourself considering refinancing or obtaining home loan rate pricing. At this point, it’s also wise to talk to a broker because there are many considerations, and they can help you work through the options.
Plus, the home loan market is constantly changing with interest rates fluctuating and lenders constantly competing for new business. To ensure you are still on the most competitive home loan rate it’s important to compare home loans every 12 - 18 months. If your rate isn’t competitive, call your lender and ask them for a better deal or if they won’t budge, perhaps it’s time to talk to a broker.
A final word
We hope this has helped explain the home loan process, what lenders look for and what you need to be prepared for. The team at Oxygen would love to help you through the process or answer any questions. At Oxygen we have a very simple value proposition - provide our customers with a higher quality advice, the most competitive loan and to do it hassle free. To talk to one of our home loan brokers click here.
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McGrath Limited and its subsidiaries, together with their directors, officers, employees and agents have used their best endeavours to ensure the information passed on in this document is accurate. However, you must make your own enquiries in relation to the information contained in this document and seek advice from your financial advisor, broker or accountant to ascertain its application to your circumstances.
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