Although you may not be ready to or able to buy a property right away, the below will give you a guide on how to increase your chances of having your home loan approved when the time is right.
As real estate agents with many contacts in the financial sector, we have a solid understanding of what the banks are looking for in an application.
Step 1: Basic Lending Rules
You need to ensure that you meet the lending criteria of most major banks so its crucial to look at what you need to meet approvals.
- Employment: Preferably all applicants should be in their current job for a minimum of 6 months. However for casuals and contract employees, many banks require a minimum of 12 months and for those who are self-employed will be 2 years. There may be some exceptions to these rules, however they will only apply to exceptional strong applicants.
- Credit History: Lenders will look very closely at your credit file and will rarely approve loans over 80% LVR (Loan to Value Ratio), particularly for people with a bad credit file. It is recommended that you get a copy of your credit file, pay off any outstanding debts and avoid for applying for too many personal loans and credit cards 12 months prior to applying for a home loan.
- Deposit Size: The larger the deposit the lower the risk to the lender. Most lenders consider loans for 80% of the value of the property to be ‘safe’. They are far more likely to make an exception to their usual lending policy if you have a large deposit and only need to borrow 80% or less. It’s important to note, if you borrow over 80% most lenders will charge you a once off fee known as ‘Lenders Mortgage Insurance’ and will also be stricter when assessing your loan application.
- Genuine Savings: Lenders will need to see some form of genuine savings! They know that people who have saved more than 5% of the purchase price in a savings account, shares or a term deposit are more likely to pay back a home loan than people who have no savings. It is recommended that you put all your spare funds into a separate savings account and keep making regular contributions. Again, there may be some exceptions to this for strong applicants.
- Property Type: With lenders being conservative, they prefer to finance properties that are as ‘normal’ as possible. They may also have location restrictions and only lend to those who are buying in a large town or capital city.
- Asset Position: Lenders will also like to see you asset position match your age and income. An example of this would be a 50 year old earning $100,000 per annum and not having any savings – their loan would not be approved. Again, it becomes important to be able to show genuine savings and be able to provide a solid and positive credit history.
- Payment History: Are you paying your credit card, personal loan and rent on time? If not, then how will you manage your home loan repayments? Lenders particularly dislike people who miss repayments, even if they are a couple of days late. Try to manage your money well and avoid being late on any of your repayments.
- Guarantors: If you have a guarantor then you may be eligible for a 100% LVR loan. Around 60% of first homebuyers either get a gift or a guarantee from their parents to help them buy a property. This is one of the easiest ways for young people to enter the property market, so it is an option worth discussing with family.
If you don’t meet the above criteria please speak to one of our agents who can connect you with a qualified financial advisor and/or broker who will be able to assess your individual situation.
Step 2: Keep all your Documents
Lenders typically ask for a lot of information when you apply for a loan. The more information you provide, the better the chance your loan will get approved. Keeping all the statements of your loans and credit cards, as well as pay slips and tax returns can strengthen your loan application. You will also need to provide 100 points of ID (drivers license, Medicare card & ATM card), a recent statement for all your debts (received in the mail including all pages) and if you already own any investment properties, provide a recent rental statement.
- Evidence of deposits, such a bank statements
- If you saved your deposit, then you’ll need to provide 3 months of bank statements
- In SA you will need to provide a the first two pages of the copy of contract of sale (this isn’t required for pre-approval)
- Either a building contract, a formal written quote or a tender
- Plans (must be council approved or draft)
- Council rates notice for the property or properties you may be using as security
- 6 months of statements for your current home loan
- PAYG Applicants
- Your two most recent payslips
- It is also option to provide your last year’s group certificate
- Self-Employed Applicants
- 2 years of personal tax returns
- 2 years of personal tax assessment notices
- 2 years of company/partnership/ trust tax returns
- 2 years of financial statement (if available)
- 100 points of ID (drivers license, Medicare and ATM card)
- Council rates notice for the property being used as security for the guarantee
- One recent statement for any loan on that property
Step 3: Increase the size of your Deposit
As mentioned, the larger your deposit the cheaper your loan will be! You should aim to save a minimum of 5% of the purchase price before applying for a loan, and in most cases there is no need to save anymore than 20% of the purchase price.
Remember the larger your deposit, the less you will be charged as Lenders Mortgage Insurance. If you borrow 80% or less then you will not have to pay the insurance and some lenders may still accept your loan even if you fall outside their usual lending guidelines.
Always be sure to check with you lender about their definition and criteria for genuine savings. If you don’t save your money the way in which the bank will accept, then you may need to wait an additional three months before they accept your application.
Step 4: Ask for Advice
If you’re unsure of where to go for advice, we recommend you speak to one of our agents who will be able to provide you with a range of contacts in the financial and lending sector. They then will be able to provide you with tailored service to suit your needs and assist you in the loan application process.