Preparing for your first home loan
The thought of taking on the biggest loan you’ll ever have is quite daunting. There is also the question of who to ask and who to trust regarding the myths surrounding your first loan. Topics like credit files, lending policies and deposits.
The good news is despite a changing credit environment over the past few months, one thing lenders are still very keen to do is to loan money for someone to buy a home to live in. This type of loan typically performs quite well from the lenders perspective and is deemed to be lower risk than an investment loan. Australians are also pretty good at paying their mortgages on time and our behaviours suggest that we would go without other expenses, in order to have it paid.
So how do you really make your situation look attractive to a lender and get a loan? From over a decade of experience in this space, I’ve compiled this list of areas that you need to pay attention to. This will help you get into shape and make you irresistible to a lender!
The absolute minimum amount of cash you will require is 5%. That is, you can borrow up to 95% of your new homes value. Depending on the lender, how you acquired that 5% deposit is important as well. Some will want to see that it was genuinely saved (over a period of 3 months or more) whilst others will take your rent payments as proof that you can meet your commitments and therefore your 5% could have been sourced from anywhere – legally that it is !
Funds to Complete
This is a way to describe the ‘other’ money you will need. Remember depending on where you are buying there could be stamp duty payable on the purchase. In some states there may be first home buyer discounts or reductions. You can check out the ‘office of state revenue’ for your state online. There is usually calculators and great tools for you to estimate what these charges might be. Lastly, don’t forget about your solicitor or conveyancing fees, pest and building inspections.
There is enough to talk about affordability to warrant a whole post just on this subject. Quite simply you need to be able to show a lender that you can afford to borrow. This is after any other ongoing payments or credit facilities are taken into account, together with a reasonable amount of money for you to cover living expenses.
Housing affordability has been in the media a lot lately particularly with reference to the markets in Sydney and Melbourne, given the growth we have seen there. The key is to start with what you can afford and work up from there. A good broker or lender will be able to run through a simple affordability calculator with you to let you know where your price range is.
Beer n’ Nachos Debt
We’ve all got it, you know that credit card that isn’t paid off every month? Beer n’ Nachos debt is when you have nothing to ‘show’ for a debt, like a car or a holiday. You just have this amount left to pay each month. Credit Card debt can not only cost you thousands in interest and keep you in debt, it absolutely limits your borrowing power when it comes to a mortgage.
A simple exercise is to take your credit card limit (not the balance) and multiply it by three. That amount is a conservative guesstimate of what you can’t borrow because of your credit card. Get in the habit each month, when you make your payment to ring the bank and reduce the limit. That way there is no temptation to go and spend it again. Also look at your statements, many card providers are actually listing the amount of interest you will pay if you only pay the minimum repayment each month and then what it will look like if you pay more.
Showing your credit history to a bank is a little like going for a job interview. I’m going to assume that like me, every job you’ve applied for has asked about your experience and work history. A lender will obtain a copy of your credit report (also known as a Veda Report) to see how you have dealt with credit in the past. A Veda report will give your full history since your credit file was opened (the first time you got a credit card or mobile phone usually). It lists all your reported employers and addresses as well.
You can find out more about credit history reports here https://www.veda.com.au/ .
It is really, really important that you pay all your bills on time. This includes utility payments like phone and electricity. Late payments and defaults lower your credit score. The lower your credit score the less likely you are to be able to borrow.
Where to from here?
If you’ve followed these steps chances are you’ve developed a relationship with a lender or broker. This is a great time to seek a Pre-Approval before you fall in love with a property. This is where you find out how irresistible you are!
Samantha is the Director of Thrive Investment Finance. She started Thrive to share her specialist expertise and passion for finance. She works with everyday people – mums and dads, small business owners, health workers, administrators, tradies, teachers – people like you and me. People with no specialist expertise in finance who want to create a secure future without missing out on life today.
Contact Thrive (07) 3103 1450