The exciting moment has come for you to make your next big purchase! Whether you’re thinking about buying your first home or adding to your portfolio, you will most likely need a Home Loan. Your first mission is to get approval for your Home Loan, so how can you make yourself appear more desirable to your Lender? Read the seven steps below to find out!
1. Credit History
First and foremost, your credit history will be under the spotlight; this determines how well you manage your money. It is crucial that all your credit cards and personal loans payments are up to date. Ideally, your Lender will prefer you to have all your debts paid off 12 months before you apply for your Home Loan. First impression counts and your Home Loan application won’t look good if you have outstanding debts!
2. Length of Employment
This is obvious, but your length of employment will determine your ability to make the ongoing Home Loan repayments once you have been approved. A stable income is a must, and your Lender will require you to be employed for a specified period. So, before you decide to make a career change, consider the ideal length of employment below:
• Full-time employment at a minimum of 3 months.
• Part-time employment at a minimum of 6 months.
• Casual and Contract employment at a minimum of 12 months.
• If you are self-employed or are a self-funded retiree, then you will need to provide your tax returns for the last 2 years.
However, these conditions are not set in stone, and there will be exceptions depending on your circumstances.
3. Deposit size
The next step is to determine your deposit size. The general idea is that the larger your deposit, the less you’ll have to borrow and naturally you will be less risky. Lenders often hesitate to finance more than 80% of the purchase value of your property. Therefore, you should aim to have a low Loan Value Ratio (LVR) to improve your chances of getting your Home Loan approved.
Here’s an example: The purchase price of your dream home is $250,000 (Value), your deposit is $50,000, and so you will need to borrow $200,000 (Loan). Therefore, your LVR is 80%. However, if you have a larger deposit, for example, $100,000, then you will only need to borrow $150,000 (Loan). In this case, your LVR is 60%.
Your LVR can be calculated using the formula below:
(Value – Deposit) / Purchase Price = LVR
In some cases, you will need to borrow more than 80% of the purchase price of your property, but don’t panic, this is not the end of the world. Your Lender can fulfil this request; however, they will have to apply the Lender Mortgage Insurance (LMI). This insurance covers your Lender in case you default on your Home Loan. Keep in mind that the LMI application process is rigorous, and your Lender does not have control over the outcome of your application. You can learn more about LMI by reading our previous post here.
4. Genuine savings
Your ability to save a set amount of money regularly will be in your favour. It shows that you are already in the habit to pay off your monthly Home Loan and indicates that your current income is sufficient for your lifestyle. As a preference, you will only need to save 5% of your property purchase price, and this can be shown in a separate saving account under your name or a share or term deposit, whichever suits your saving style.
5. Payment History
Genuine savings predicts your ability to make consistent payments towards ongoing expenses, whether it’s daily, weekly or even monthly; however, your payment history is what will confirm it. Similar to your genuine savings, this also shows that you are in the habit to make regular repayments towards your Home Loan. You can expect your Lender to request the following documents as proof:
• Loans statements.
• Credit card statements, including store cards like GE Finance or your Myers card.
• Rental statement from your landlord.
A good tip is to make sure that all of your payments are paid on time. Any late payment might raise a red flag and jeopardize your chances of getting your Home Loan approved.
6. Property Type
Most Lenders follow stringent lending criteria, where they are limited to finance only residential properties. Therefore, if you’re thinking about buying that extravagant 10-bedroom beach house overlooking the coast or the old factory that you’re itching to turn into your dream home, you may have to reconsider. In this case, your Lender will have to refer you to a specialist. Your best bet is to choose a “normal” property, something like the four-bedroom house with the white picket fence.
A guarantor will be liable for your debts if for some reason you can’t repay your Home Loan, in most cases, this will be a family member. Having guarantors is a great way to get your foot into the property market as it reduces your risk and increase your chances of getting an approved Home Loan. Keep in mind that even when you have guarantors, you will still need to meet all of the above criteria to be approved. Also, note that different lenders will have different rules when it comes to guarantors, so keep your mind open.
At FutureNow Finance, we can help you plan towards your next property, whether it’s purchasing your first home, buying your next home or adding to your existing portfolio. Contact us today if you’d like to discuss your future plans and how we can work together. Call 1300 013 730 or email firstname.lastname@example.org.