By Maya Pavlovski
If you are a new to the lending game and have never taken out a home loan before – here are some issues that you should consider before choosing your loan.
1. Check your credit rating
Before approaching a lender for a home loan make sure that you have a clear understanding of what is on your credit report. There’s nothing worse than being refused a loan because of a small debt that you fixed up years ago, or an error which was not your fault or responsibility.
Get a copy of your credit history on http://www.mycreditfile.com.au. If you do find something, take immediate action. If the report contains any mistakes these have to be removed by writing to the credit provider.
In the event that your credit history is very unhealthy you may need to approach a lender who specialises in Bad Credit Home Loans. Traditional lenders such as the major banks will generally not consider such loans. Applicants with a history of bad credit also must have a deposit. While some lenders do offer No Deposit Home loans – these are only available to applicants with a clean credit history.
2. Know your entitlements
If you qualify, you will receive the federal government’s $7000 First Home Owner’s Grant (FHOG). To find out if you are eligible check http://www.firsthome.gov.au. There are also state bonuses which you can find out about by checking with your office of state revenue.
3. 100-point check
If you’re approaching a lender for the first time — ie. you have no existing relationship with them — you’ll need to be “identified”. When you apply for a home loan you have to show identification up to the value of 100 points. A driver’s licence earns 40 points, a credit card can earn 25 points and a birth certificate 70 points.
4. What Type of Home Loan should you consider?
What sort of a borrower are you? Should you look at a Low Doc or a No Doc Loan? Are you a Non-conforming borrower? This will depend on the following. Your
- employment status;
- income position;
- available deposit;
- residency;
- age;
- availability of financials;
- credit history
5. What will the lenders need to know about you?
It’s not unusual for a home loan application form to take up to 10 pages. There are four main points lenders look for:
o Your capacity to repay.
o Your security property .
o Your existing assets.
o Your existing liabilities.
Some of the questions you can expect to be asked are:
o Your dependent children.
o How long have you lived at your current address?
o What do you owe and own?
o Your accountant’s details.
o Your personal insurance.
o Your credit cards.
6. Supporting Documentation for Your Loan Application
When it comes to the documents you need to support your application, most lenders are likely to ask for the same information. And yes, it is harder if you’re self-employed.
A PAYG applicant is expected to provide the following with their application:
o At least the two most recent pay slips, and group certificates for the past two years.
o A letter(s) from your employer(s) detailing income (for the past two years) and length of employment,
A self-employed applicant will need to submit:
o Past two years’ tax returns and your accountant’s details, or past two years’ financial statements and your accountant’s details. Some institutions may even ask for a profit and loss statement certified by a registered accountant.
Saving details:
o Bank statements including transaction, saving or passbook accounts.
o Investment papers including managed funds or term deposits.
o What you owe and own.
o Details of personal loans, credit cards or charge cards. Up to six months of statements should be produced to support these loans.
o Tax liability (if self-employed).
Life insurance policy details.
o Superannuation details.
o Approximate value of other assets such as furniture and jewellery.
If you do not have the necessary documentation – do not despair. You may be able to borrow under you lender’s Low Doc or a NO Doc program. While your LVR will be slightly lower than with the Full Doc loans(65% – 90%), the loan application process will be far more straight forward.
7. How much can you borrow?
The amount you can borrow depends on what you’re buying and how much money you have left when you take out all your fixed commitments from your net income. All lenders have their own affordability calculator which they will use to qualify your application.
If you’re buying a home, most lenders will let you borrow up to 80 percent of the purchase price, or 95 percent if you are willing to take on mortgage insurance. Mortgage insurance is designed to protect the lender. A number of online calculators can help you determine how much you can borrow.
Some lenders even offer 100% or more of the purchase price. However these loans are quite difficult to qualify for and require a perfect credit history as well as strong financials.
8. Don’t Forget the Loan and Purchase Fees.
You should be aware of all the fees and charges that come part and parcel with a new home as well as with a new home loan. There’s much more to it than just a deposit. To avoid any last-minute surprises you need to ensure that you have enough to cover the cost of conveyancing, applicable stamp duty on purchase as well as stamp duty on mortgage. There are also various application fees, lender valuation fees and even possible mortgage insurance fees (depending on your Loan to Value Ratio – LVR).