Getting a home loan can be an overwhelming experience, from choosing a mortgage broker and lender to sorting through all of your other finances.
It can be hard to know where to start and what all the jargon means.
Here are some key loan questions that first-time home buyers answer.
HOW TO GET A PRIOR APPROVAL FOR A NAME LOAN?
First, you need to decide who to get pre-approval from.
Finspo co-founder and chief executive Angus Gilfillan says a broker can navigate the market and find the right lender.
You will need to collect the main supporting documents to prepare your application.
Your broker should guide you through this process and will usually ask for the following:
- ID and payslips for the last few months, or if you’re self-employed, they’ll need your financial details for the last two years;
- A statement of your current debts and deposits; and
- Estimate your major expenses, such as rent and credit cards.
The broker will also help you submit your pre-approval request to the lender.
You can do all of these things yourself rather than using a broker, but they are useful, especially for first home buyers.
“If successful, your pre-approval is usually valid for three to six months,” Mr Gilfillian said.
“It is usually possible to renew by providing updated financial information. Otherwise, you will need to reapply.”
WHAT DOCUMENTS ARE NECESSARY TO OBTAIN A HOME LOAN?
Mr Gilfillian said lenders essentially try to confirm three things about an applicant.
First, they need to verify your identity, so a driver’s license or passport is required.
Second, they want to understand your current financial situation.
“In a nutshell, what you own and what you owe,” Mr Gilfillian said.
“This includes assets such as deposits, investments, houses and cars, as well as any liabilities such as credit card debt, HECS debt or any other loans.”
Third, they will need supporting documents such as bank statements, payslips and credit card statements.
“They assess whether you can afford the pre-approval you’re requesting. In other words, your income and expenses,” said Mr. Gilfilyan.
WHAT DO YOU NEED TO KNOW ABOUT YOUR CREDIT RATING?
Mr Gilfillian says that if you know of some previous defaults, it may be useful to let your broker know so they can consider which lenders would be most suitable for pre-approval.
WHO CAN BE YOUR GUARANTEE WHEN PURCHASING A HOME?
A guarantor is someone who adds an extra layer of security for your lender.
This is often done through equity in the property, known as a security guarantor, or sometimes through income assistance, known as a service guarantor.
“When someone becomes your guarantor, they agree to take on some of the risk if, for whatever reason, your loan can’t be repaid,” Mr Gilfillian said.
It should be noted that lenders differ as to who can be your guarantor.
“Typically, lenders accept parents, spouses or partners, as well as close relatives such as siblings,” Mr Gilfillian said.
“Many lenders will not allow distant relatives or friends to stand as your guarantor.”
WHAT IS THE LOAN TO VALUE RATIO (LVR)?
LVR is the value of your loan compared to the value of your property.
The higher the LVR, the higher the perceived risk to the lender.
“If you can get an LVR below 80 per cent, it often means you can avoid having to pay for lenders’ mortgage insurance,” Mr Gilfillian said.
“Often the lower your LVR, the better deal you’ll get from lenders.”
WHAT ABOUT PRINCIPAL AND INTEREST VERSUS INTEREST ONLY PAYMENTS?
The principal amount is the amount of money you borrowed from the lender to buy the home, which you pay back over time – that is, the balance of the loan.
Interest is the interest payment you make to a lender for borrowing money (principal) from them. This is how lenders make their money.
“A principal and interest loan pays your principal back, plus the interest it accrues,” Mr Gilfillian said.
“Your loan will get smaller over time with this type of loan.
“In an interest-only repayment period, you only pay back the interest. This means your principal balance will remain unchanged.
“Although the repayments will likely be lower to begin with, eventually you will have to start paying back the principal.”