8 Steps to getting your Home Loan Approved.
This is an exciting time in your life! You’ve decided to buy your first home or expand your property portfolio or to get some much need renovations done. But what’s the next step?
What do you need to get a Home Loan approved? What do Lenders look for? Where do you start??
Let’s start at the beginning with the 8 Steps that Lenders follow to get your Home Loan approved.
1. Employment History.
This is really important. Lenders need to know that you can hold down a job for a significant period of time. It shows that you are able to bring in a regular payment to pay off your loan and be able to feed yourself and your family at the same time.
As a general rule Lenders look at full time employment at a minimum of 3 months, part time at 6 months and casual and contract workers at 12 months….that’s if you have a boss. For self employed and self funded retirees Lenders will ask for your last 2 years of tax returns.
In saying that, there are always exceptions to these rules if you have a strong application.
2. Your Credit History.
Lenders will actually look at this first, even before your employment history. If you have a wallet full of credit cards and a filing cabinet full of current personal loan statements you will be considered as a high risk applicant. This might be a good time to get those cards and personal loans paid off…and NOT apply for anymore…if you’re serious about getting a home loan.
Home Loan Lenders would, very much, like to see these debts paid off at least 12 months before you come and see them.
3. Deposit Size.
Ok, so your credit history is on track. Next is the size of your deposit toward the home of your dreams. The larger the deposit, the lower the risk is to your Lender. Lenders don’t really enjoy financing more than 80% of the purchase price of your home. You’ll hear the term LVR mentioned at this stage. This means Loan to Value Ratio. For example… You’ve found the perfect home for the purchase price of $250,000 (Value), your deposit is $50,000, so you’ll need finance of $200,000 (Loan). Your LVR is 80%.
The equation looks like this:
Value ($250,000) – Deposit ($50,000)
Purchase Price ($250,000)
= LVR (80%)
Lenders can lend more than 80% LVR, however, Lenders Mortgage Insurance (LMI) will come into play. This is an Insurance that covers the Lender, NOT you. What this means is that your Lender won’t have control in deciding the outcome of your loan application. LMI are very strict when assessing applications.
4. Genuine Savings.
Lenders love to see that you’re able to regularly put money aside as savings because this means you are already in the habit to pay off your home loan. And all you need is 5% of the purchase price as regular savings. It can be shown in either a separate savings account in your name, shares or a term deposit. Just remember that the more you save over a longer period of time is only going to help your loan application.
5. Property Type.
There is a fairly strict criteria that Lenders need to follow when it comes to property type. Your lender may only be qualified to lend finance for residential property but not rural property if you’re looking to have a tree change. Or you’ve fallen in love with that old factory in the industrial part of town that you’re aching to renovate into your dream home. Don’t be disheartened, your Lender should be able to refer you to a specialist lender in these cases.
Lenders are very conservative and prefer to provide finance for ‘normal’ properties. So, if you’re looking at a lovely residential house with the white picket fence or a unit with an interior of at least 50m2 (not including car spaces or balconies) you’re more likely to have your loan approved.
6. Asset Position.
When assessing your loan application, Lenders will ask themselves, “Do the assets match the applicants age and income?”. For instance, a first home buyer at the age of 26 with an income of $42,000 p.a. should have some home contents like a fridge, TV, furniture, a term deposit they’ve had since childhood and a car that they may be paying off. This applicants loan would probably be approved over a 50 year old first home buyer earning $100,000 p.a. with no assets. It’s a bit judgemental but there you have it.
7. Payment History.
Just like your Genuine Savings, Lenders really like to see that your rent, credit cards and personal loans are being paid on time. Again, it shows that you’ve got great budgeting habits and you’re more likely to get that Home Loan approved. Your Lender will ask for statements of your loans and credit cards (including store cards, like GE Finance, Myers card etc). You’ll also be asked to provide either bank statements or a rental ledger from your landlord to confirm that your rent is up to date. Try not to be late with any of these repayments as it won’t bode well for your Home Loan application.
8. Guarantors.
If you’ve discussed buying your first home with your family, they may offer to guarantor your loan so that you can get your foot into the property market sooner. And that’s great! However, you’ll still need to meet all of the above criteria to be considered for approval. And if your lovely family members have offered to guarantor your loan, be aware that if you can’t pay back your loan for any reason, they will be liable for the loan. Different lenders will have different criteria regarding guarantors.
Now you are armed with the knowledge of what Lenders look for in a Home Loan Applicant.
You’re now ready for the next step…. How much can you borrow?
