Are you planning on applying for a home loan? Whether it’s your first time or not, there’s always something you can learn to make the process easier and help you secure the best deal.
These five tips will help you improve your chances of securing a home loan the first time around.
- Establish a regular savings pattern
Gone are the times when you don’t need to put any money down for a deposit. These days you should be aiming to have a deposit of at least 10% to secure a home loan. If you’re buying a property worth $500,000 then that’s $50,000 or more you’ll need saved.
Banks are on the lookout for cash ‘gifts’ from parents or a loved one who may want to help out or may be kind enough to offer you an interest free loan. So, if you are lucky enough to have a generous friend or family member willing to help you out, then you’ll also need to be able to show you have a good history of saving and a good credit history so you can service the mortgage long-term.
Many of us have issues coming up with the bulk amount of money needed for a deposit but a minimum deposit of 5% is required as authentic savings. However, if you are a super saver and can come up with 20% of a home loan deposit, then you can avoid paying costly mortgage insurance.
The best way to prepare for a home loan is to develop a clear understanding of the property market before you begin house hunting. Determine roughly how much money you will actually require. And always add on an extra few thousand on top to make sure you’re covered.
- Servicing mortgage repayments
Paying down a mortgage isn’t an easy task and there are always unexpected costs bound to trip you up. You have to be comfortable you can manage your mortgage repayments. It’s important to have a financial buffer and to ensure you have extra money available if needed to cover expenses so you won’t risk having to sell your home quickly (and potentially losing big money as well as your home).
It’s one thing to have the bank give you a loan, but it is another to be able to service that loan for 30 years or more. You have to make sure that you’re in a position so you won’t place you or your family in financial distress. Even if the bank will loan you extra money that won’t necessarily work in your favour. Remember, you need to ensure you can actually pay back what you are borrowing (plus interest).
Having a financial back-up will give you a buffer which can act as your own kind of mortgage insurance. For instance, if your weekly rent is lower than your proposed mortgage repayments, save the difference and place this amount into savings. This is a great way to show the bank you can service your proposed mortgage. It’s also a great way to get in the habit of saving.
- Cut the debt
Debts are the number one reason banks will potentially decline your home loan application. So, it’s crucial that you can at least pay down your debts to a manageable level. If you have several credit cards, reduce your limit or consolidate them into one credit card with the lowest interest rate possible. It’s a good idea to look around for special offers such as a 0% interest rate for a fixed period of time to give you breathing space to help pay down your debts. This will also help your chances of borrowing more money in the future. The less debt you have, the higher your loan approval rate will be.
It is important to understand that if you have a credit card where you can spend up to $20,000 then the bank will subtract this $20,000 from the total amount they are willing to lend you (even if you have never spent a cent on your credit card).
It’s worth looking into your credit file which determines whether or not your loan application will be approved. You can access this by visiting www.mycreditfile.com.au.
- Set a budget and stick to it
Creating a budget is the most practical thing you can do to get a home loan approved. If you can, then stick to a realistic budget for 12 months or more before applying for a mortgage. Cut down on your weekly spending and try to save as much as you. It’s best to have a separate savings account where you can make frequent deposits and avoid withdrawal fees. Pick a figure to save and stick to it. Then whenever you can put extra money into this account. Making regular deposits will increase your chance of getting a home loan approved quickly. Sell everything you have you don’t need or no longer want or use. Have a garage sale or pick up an extra job on the weekends. Remember, every dollar counts.
It will be important for the bank to see you have a regular source of income so they will ask questions (and need proof) showing you are earning a certain amount of money in a full-time role. It is possible to get a home loan when you are working on contract or if you are freelance but you’ll need to be able to provide tax information from the past few years to verify how much money you have been earning during this time.
- Be realistic
When considering buying a property, it’s important to be realistic with your financial goals. It’s easy to get carried away with the excitement of entering into the property market. However, you have to be able to show that you can live within your means, make regular mortgage payments and have enough to pay for things such as council tax, water rates, house and contents insurance and more.
If you’ve been rejected for a home loan in the past, then re-evaluate your potential budget to be more realistic. Remember, even if a bank does loan you money, that isn’t a good thing if you can’t afford to pay the loan back. It’s better to put off making an application until your finances are in better condition.
After approaching your bank about a home loan, sit down and think about whether you can afford to pay off the loan on offer. Is it realistic? Will you still be able to pay for the necessities such as electricity and also enjoy a few pleasures in life such as socialising? It’s one thing to borrow money, but another to pay it back. Crunch the numbers and write them down on paper. Does the proposed home loan fit within your budget? If not, then it isn’t the right loan for you.
A useful tool to use is the Borrowing Calculator found in most financial institutions websites. It will help you to determine how much you can borrow with your income and expenses .