Being prepared when getting your home loan

Applying for a home loan is the first step towards home ownership. It’s an exciting time, but it’s also a complex process, which includes several basic steps: deposit and incidentals, proof of savings, proof of income, employment and address, a credit check; and insurance.

You have more control over some of these steps than others. But at every step, you can improve your chances of an approval by being prepared and making plans in advance. Let’s look at them:

• Deposit: the ideal deposit amount for a mortgage in Australia is 20 per cent of the purchase price. However, with the aid of Lenders Mortgage Insurance people can purchase with as little as 10, or even 5 per cent deposit. The deposit is the amount the lender wants you to put into the property in cash. You must show you have this money, as well as proving the ability to pay conveyancing, stamp duty and discharge costs. So start your saving early and have your proof of deposit ready.
• Savings: lenders want your deposit to be predominantly achieved through your own income and savings. In preparation, spend at least six months saving your deposit in a designated savings account, preferably with regular deposits, topping up with tax refunds and work bonuses.
• Income and employment: lenders want to see pay slips from your employer. They prefer that you’ve been in a job for 12 months, but many will accept six months as long as you have worked in a similar industry previously and not subject to a probationary period. So don’t start a new job just before applying. Self-employed people have to provide up-to-date tax returns to prove income and it helps if you can point to regular income from clients in your bank statements. Self-employed people must prepare their tax debt in advance of applying, to show there are no taxes owed to the ATO. Employment changes are sometimes not in your control, so if in doubt seek the advice of an experienced broker to discuss your options.

• Address: lenders are generally less comfortable with borrowers who change their address often. As you prepare to apply for a home loan, ideally try to live at the one address for a year or more. However, changes of address can be due to other factors, not always within our control, so the very fact of a recent change of residential address should not dissuade you from making an application.
• Credit check: Credit cards, personal loans, car loans and store credit applications are all disclosed on your credit file. Payment issues with any of these, as well as with telco providers, or any other credit provider, are detailed on your credit report. It is always a good idea to know what information is included on your credit file before you apply for credit. You should also be aware that too many applications for credit can impact on your credit score.
• Stress test: lenders use ‘stress tests’ to ensure that if interest rates rise, the borrower has enough net income to make repayments. So it’s always best to apply for an amount you can comfortably afford. A lender will look at your monthly living expenses and financial commitments as well as how much you are looking to borrow to determine your “serviceability”. It is useful to remember that your credit cards will be assessed based on being fully drawn, which means large credit card limits can actually lower your borrowing capacity.
• Insurance: Prior to settlement of your loan and purchase of your property the property must be fully insured and the mortgagee (lender) noted on the policy. Your lender or broker will be able to guide you as to what is required here.

In most cases, the first home buyers who are well-prepared are the ones who are approved with no problems. Before applying for a home loan, make a to-do list, or see a mortgage broker. And then make a plan.