Getting a home loan
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RBA to hold: have home loan rates hit the bottom?
The Reserve Bank is expected to keep the cash rate on hold at 0.25 per cent when it meets today, but the rate cuts keep coming from the banks for new home loan customers.
Getting a home loan in Australia can seem like a daunting prospect, whether you’re preparing to buy your first home or are an experienced investor. Even if you find a property you can afford, it’s easy to feel uncertain about whether the bank will approve your mortgage application.
To help you apply for home loans with confidence, here are our tips for getting a home loan, including what you’ll need before you apply, the steps involved in the application process, and how to increase your chances of getting a home loan approved.
What you’ll need for a home loan
Applying for a home loan in Australia can be a complex process, and different banks and lenders may have different requirements for their mortgage applications.
Some of the more common requirements from lenders include:
- Proof of identity (drivers licence, passport or similar)
- Proof of residence (utility bills or similar addressed correspondence)
- Proof of employment/income (payslips, bank statements, tax records)
- Proof of savings (bank statements)
- Proof of current assets (other properties, stocks, cars etc.) and debts (other loans, credit cards etc.)
Other requirements may be necessary for some other types of mortgages, such as if you’re refinancing an existing loan, or if you’re applying for a home loan with the help of a guarantor.
How to get a home loan
When you’re preparing to buy your first home, it’s important to understand how the home loan application process works in Australia:
1. Research and comparison
As well as researching to find the right property for you to live or invest in, you’ll need to look at the different home loan options from different banks and lenders to find one that suits your personal finances.
If you need help comparing your options, you can use a comparison website, or get in touch with a mortgage broker to take you through the process.
Gather up the necessary information and documentation, and submit your home loan application with the lender of your choice.
Be sure to double-check all the documents so you can be confident there are no errors that could affect your home loan application.
3. Conditional approval
If your application has been all good so far, the lender should agree to finance your property purchase, provided the valuation checks out and your documents are verified to be correct.
At this stage, you should receive a formal document from your lender listing the conditions that will need to be fulfilled before they will agree to provide you with a home loan.
Just remember that conditional approval (sometimes known as a formal pre-approval) doesn’t mean your mortgage is 100% locked in – it’s still possible for your home loan application to fall through and for you to lose your deposit – but it’s usually enough to let you bid on a property at an auction or make an offer for a private treaty sale.
Is conditional approval the same as pre-approval?
Pre-approval and conditional approval are two different stages of the home loan application process.
Pre-approval indicates that your mortgage application ticks the boxes on the lender’s approval criteria, but nothing is locked in yet.
Pre-approvals are often computer-generated quite quickly after your application is received (sometimes in less than an hour), and can be used to show that you’re serious about your property search, but aren’t a formal agreement like a conditional approval.
The lender will assess the value of the property you’re buying to confirm that it matches the amount you are borrowing, so they can be confident that if you end up defaulting on your mortgage payments, the sale of the property would let them recover their money.
Sometimes this involves a physical valuation, where an agent of the bank comes out to inspect the property in person. In other cases, an online valuation is conducted based on previous sales data and other related information.
It is possible for a mortgage application to fall through at this stage if the property’s valuation isn’t enough to secure the home loan, or if it affects your Loan to Value Ratio (LVR) to the point that you have to pay Lenders Mortgage Insurance (LMI).
5. Unconditional approval
If your application has checked out thus far, the value of your chosen property lines up with the amount you’re borrowing, and you’ve fulfilled any of the lender’s other terms and conditions, then the lender should be ready to formally approve your mortgage application.
This is the point when the lender will send you your official mortgage documents, agreeing to lend you the money you need to buy your property. You’re almost there!
At this stage, all that’s typically left is to take care of some paperwork and fees.
At this point, you’ll likely need the help of a conveyancer – a legal professional who can help you through the settlement process, including transferring the property title into your name, and working out what stamp duty and other taxes and fees you need to pay.
Once you’ve signed all the papers, and paid all the fees, the property is yours – congratulations!
How to be approved for a home loan
There’s no way to guarantee that your home loan application will be approved by a lender, as each application is considered individually, based on each lender’s criteria and each borrower’s personal financial situation.
That said, there are a few methods to help prepare you in buying your first home and can increase your chances of getting a home loan from a lender:
Build a good credit score
Many lenders will take your credit score into account when assessing your home loan application. Your credit score is a general indicator of your financial responsibility, and is generated based on your credit history, which is your record of borrowing and repaying money.
If you’ve successfully applied for loans or credit cards in the past, and have paid them back on time and without issues, you’re likely to have a good credit history and thus a good credit score, meaning your lender is more likely to approve your mortgage application.
But if you’ve had money troubles in the past, have been declined for a loan or have defaulted on repayments, you could have a bad credit history and a poor credit score, which could affect the success of your home loan application.
Bad credit home loans
Avoid making multiple applications
If you apply for a home loan and get rejected, you may feel tempted to immediately apply for another mortgage with a different bank.
Similarly, it may sound like a good idea to “shop around” for home loans by firing off applications with several different banks and lenders all at once to see who will approve you.
However, these behaviours could not only mean being rejected for a home loan, but they could damage your credit score, making it harder for you to borrow money in the future.
Every time you apply for a loan, the lender performs a credit check, which is recorded in your credit history. If a lender sees multiple credit enquiries over a short period, they may think that you’ve already been rejected by other lenders, meaning they’re less likely to risk lending money to you.
If you’re rejected for a home loan, it’s often worth waiting a few months before making another home loan application, helping keep your credit history and credit score relatively healthy.
Save a strong deposit
Banks use the deposit on your mortgage to help guarantee the loan. The larger your deposit, the lower the lender’s financial risk. The lower the lender’s risk, the more likely they are to offer lower interest rates, cheaper fees, or extra benefits.
Many lenders prefer an upfront deposit of at least 20% of the property’s value, though some may accept smaller deposits of 10% or even 5%.
It’s important to remember that if your home loan deposit is smaller than 20%, you’ll have a Loan to Value Ratio (LVR) that’s higher than 80%, and your lender will likely require you to pay for Lenders Mortgage Insurance (LMI), which could add thousands of dollars to your mortgage’s initial costs.
Keep in mind that some lenders may require you to show evidence that you’ve saved up your deposit funds out of your regular income, thus demonstrating your financial responsibility, before they’ll approve a loan application.
How to get a home loan with no deposit
If you can’t afford a mortgage deposit, unfortunately there aren’t any no-deposit or 100% home loan options available any more.
However, you may still be able to apply for a home loan without saving a deposit if you have the help of a guarantor – a family member who can afford to use the equity in their own property to guarantee your loan, and who will assume the responsibility if you default on your repayments.
Guarantor home loans:
Maintain a steady income
Before a bank will approve a home loan application, they’ll want to be confident that you can comfortably afford the mortgage repayments, now and in the future, without ending up in financial stress. Generally, if more than one-third of your income will go towards mortgage payments, you’re considered to be in mortgage stress.
When you apply for a mortgage, you’ll need to provide evidence of your regular income (e.g. payslips, tax records) and regular household expenses (bank statements, bills) to demonstrate that you can afford the mortgage on your current budget, and that your income is stable enough to keep up with these repayments for the duration of your loan term.
If you are a contractor, freelancer or small business owner and don’t have a regular income where you receive payslips and the like, you may find it more difficult to get a typical home loan application approved by a lender. Instead, you may need to apply for a low-doc or no-doc home loan from a specialist lender.
Low doc home loans:
Can I get a home loan on a low income?
Getting a home loan with a low income can be difficult, but not impossible, as long as your income is fairly consistent and you can afford the repayments.
You can use a home loan calculator to estimate how much you can afford to borrow while still meeting your other financial commitments.
Clear your debts and cancel your credit cards
If you already owe money on personal loans or credit cards, a bank may be hesitant to lend you more money to buy a property. The more money you currently owe, the greater the risk that you could end up in financial trouble if they were to lend you more.
When it comes to credit cards and similar flexible lines of credit, many lenders calculate your debt risk based on your maximum available credit limit, rather than what you currently owe. Even if you’ve always paid your credit card bill on time in the past, it’s possible that tomorrow you could spend up to your limit, so they assume a worst-case scenario.
To help improve your likelihood of being approved for a mortgage, consider paying off your personal loans and car loans, and cancelling the credit cards you don’t need to reduce your potential debt risk.
Make sure your application is accurate
Having a mortgage application delayed or declined due to a small error in your paperwork can be incredibly frustrating.
Before filling out your forms, consider checking with the lender and/or a mortgage broker to find out if there are any sections that need extra care or attention.
Some documents required as part of your mortgage application may need to be witnessed and signed by a Justice of the Peace or similar authority to ensure their authenticity.
Making misleading, false or fraudulent statements on your home loan application can have major legal consequences. Don’t try it.