In this article we look at the three steps to getting your first home loan.
When we’re buying a first home we need the support of the lending institution like a bank or another alternative non-bank lender to fund the cost of the purchase.
The mortgage on your first home is a significant size and therefore anyone prepared to lend you the money wants to know that you have the ability to repay the loan by making the repayments as they fall due
The 3-Steps You Need To Know About Getting A Home Loan
There are three key considerations that the credit people within the banks and other lending institutions look at.
- The deposit
- Your income
- Proven money-management
The banks want to see all three when you are getting your first home loan.
If you fall down in one of these key areas your application for a home loan will have a high chance of being declined.
Important Information About The Home Loan Deposit
Of course the larger the deposit you have the more comfortable a bank will be providing the remaining money that you require.
Some lenders call this “your skin in the game” meaning the amount that you could potentially lose before the lender loses anything.
You buy a house for $400,000 with a 10% deposit ($40,000) therefore borrow $360,000 from the bank.
You fall ill and cannot work; hence you cannot meet the repayments. It takes 6-months from the time you cannot pay until the time that the house is sold and with an interest rate of 7% (excluding any default interest or capitalisation) that means the interest cost is $14,000. Then there are the marketing costs to pay which could easily be $20,000.
If the house was sold for the same as the purchase price of $400,000 then after the bank and real estate agent was paid you would get $6,000 back, but if the market had declined a little or a forced sale meant that the sale price was even 5% lower ($380,000) then you lose all of the money you invested and the bank loose $14,000 too.
Of course, banks hate to loose money and would most likely chase you for the balance, and this is the reason the banks and non-bank lenders will be more comfortable with a larger deposit.
In 2013 The Reserve Bank introduced LVR rules for the banks which led to most of them requiring a 20% deposit.
It is important to understand that the banks still have the ability to provide mortgages with less than 20% deposit and so do the non-bank lenders, but they are careful and apply a more stringent criteria.
Low deposit home loans are still available too from mortgage brokers.
Your Income Is Very Important
Most mortgages the first home buyers are thirty-year mortgages and therefore the banks and non-bank lenders are looking to ensure that you have the stability with the new income to meet those mortgage repayments each month When the banks look at your income they generally will take your base salary and any other income that you have needs to be consistent
You may have done the calculations using the banks online calculators and believe you can afford the mortgage, but the banks have rules designed to protect them and it is those rules that you need to meet.
Some of the most common issues with calculating your affordability is;
- If self-employed they use an average of the last 2-years income, not just the last years. There are some other issues for self-employed to consider which are both positive and negative and a mortgage broker can help you with those.
- Any rental income is scaled back to 75-80%, but you then do not need to add the rental property expenses.
- They assess the mortgage repayments at a higher interest rate – currently we can get rates at about 5.60% but the banks still assess the loan on a rate of 7.40%
- Any regular donations and tithes are treated as an ongoing expense.
Having a flatmate will border helps but some banks do not consider all of this income.
Banks also will consider other income you receive from any part-time business, if you make money selling products (on Trade Me or selling on e-Bay) and if you have some online income, but you need to have the ability to prove this income and show that it is regular.
Having a secondary income is like having an insurance policy, and we suggest that everyone should look at some form of extra income. It provides security and with the right business it might one day might replace your existing job and provide you a better income and lifestyle.
I almost forgot to mention there are tax advantages when you have a home business!
Money management is important throughout life, but when you apply for your first home loan the banks look carefully at how you operate your accounts.
Your mortgage broker will request bank statements with your application and you may wonder why.
The reason for this is so they can analyse the way that you manage your money and ensure that you are not living living be on your means or doing anything that the banks would be concerned about before they let the banks review them.
You may think that your bank make it easier as they do not require the statements, but only because they already have access to your transaction history.
Here are some key things that the banks look for;
- Your pay (income) being deposited into your account, which they match up with your payslips
- Any automatic payments which they match up to the debts and expenses that you have declared
- Any times when your account is overdrawn beyond any limit
- Any cash withdrawals from credit cards
It is very common to miss something as you may not have even remembered it. A mortgage broker should ask for clarification before submitting any application to a bank so that all the banks questions are answered before they get a change to ask them.
The easiest way to ensure that you have good money management is to have a bigger income!
This is another reason that a lot of people are looking at a home business or an online business that can be operated from anywhere with an internet connection.
Are You Ready To Get Your First Home Loan?
Many people will approach the bank and apply for their first home loan without really knowing if they are ready or not.
The best option is to speak to a mortgage broker first you can assess your mortgage and determine whether you are ready to submit an application to the bank for an approval.
For a mortgage broker also has the ability to look at multiple banks and non-banks rather than just
one bank and before the chances of getting approval for your first home loan is a lot higher.