Becoming a first homebuyer is both thrilling and confronting. There are many complexities surrounding decisions about where you’d like to live and what sort of home you want to buy.
And then there’s the big question of finance.
When it comes to a loan application, you’re qualifying loan amount will determine how much you can afford to pay for a property. But determining that figure is a dauting task. There are so many hoops to jump through and people to deal with.
To help, I’ve pulled together this step-by-step guide on the loan application process to help first homebuyers realise their ownership dreams.
1. Seek professional help
While I’m sure most first homebuyers will have friends and family who will provide advice on securing a loan, the best outcomes result from utilising the skills of an experienced mortgage broker. Not only will the broker be able to present you with the best loan options, but they can also detail your requirements and responsibilities under a lending agreement. Let their knowledge and networks be to your advantage.
Good mortgage brokers will also be aware of any and all government schemes and incentives to assist would be buyers, that they may otherwise be unaware of.
It’s essential you bring the mortgage broker into the process early – and I mean prior to beginning your property hunt. Preparing for a loan application should be started well in advance to get the best possible financial outcome.
2. Initial assessment
The initial assessment is crucial. The broker will want to discuss your needs, wants and resources in preparation for the formal loan application process. They’ll want to know what sort of property you’re looking to buy and your anticipated budget.
The broker will also need to know about your resources. What’s your current income and outgoings each month. Do you have other loans or further financial commitments? How about additional lines of credit such as credit cards or store loyalty cards?
The mortgage broker will want to get a reasonable idea of where your finances sit so they can provide some initial assessment of your borrowing capacity. This preliminary calculation is invaluable as it will highlight any potential red flags early in the loan application process. This gives you as a first homebuyer the opportunity to address any concerns. For example, they may suggest tightening your budget and cancelling your credit card to help improve your credit score well before making a formal loan application.
3. Detailed application
Once the mortgage broker is across your general position, it’s time to begin the formal loan application process. It takes around four to six weeks from the loan application to property settlement but it can take even longer in some instances. Delays are often due to finance not being approved in a timely way because incorrect or insufficient information was given to the lender. If this is done correctly from the outset then you should be able to achieve an approval within 2-3 days but if you aren’t on top of your finances, then delays can be caused.
Fortunately, your broker will assist by describing and helping to coordinate what you must supply.
The loan application document will ask you to set out your income and expenses in detail. It will include your wages and other sources of revenue. For example, do you own shares that pay dividends, or is there income from a family trust?
In terms of expenses there will be a range of non-disposable and disposable outlays to include. This will include living costs along with other existing finance repayment such as for a car loan.
The bank also requires particulars about your assets and liabilities.
This will include all your personal assets and chattels. Be expected to provide estimated values for furniture, jewellery, musical instruments, a motor vehicle and even your superannuation as this all helps, basically whatever you own that has value.
In the same section you will need to specify particulars about your liabilities. This is where existing loans are listed. You’ll also need to describe your credit cards and store-loyalty cards. You might have other liabilities too such as an outstanding HECS or tax bill that you are servicing via a payment plan.
Documentation to support your numbers will be necessary as well. Payslips, account statements, group certificates and a copy of previous years’ tax returns should be on hand.
In short, be comprehensive with your information. Make sure all questions can be answered. I’ve seen applications denied for relatively minor gaps in an applicant’s submission.
Having this loan application managed by a mortgage broker also provides some excellent advisory advantages, particularly with what exactly you will need, as each lender has slightly different requirements.
With the full complement of your financial information, an experienced mortgage broker will have a good idea about your chances of a loan application success prior to its lodgement. They may also look at your numbers and suggest strategies that can enhance your prospects.
4. Loan application approval
Once the loan application has been submitted, it’s time for the bank to do their work.
They will look through your application and assess it against their lending criteria. This includes benchmark loan-to-value ratios as well as as a three per cent serviceability buffer to check your financial tolerance for any increase in interest rates in the future.
If you are applying for preapproval, the bank will advise what size loan you qualify for which enables you to offer or bid on a property with confidence.
If, however, you’ve already contracted on a property, the lender will need to do a bit more work. This will include instructing a property valuer to assess the market value of the home you’re purchasing to ensure it provides adequate loan security.
The approval process can involve some to and fro with the financier as well. They may seek additional information or suggest strategies to improve your chances of an approval. For example, you may need to ask a parent to go guarantor on your loan.
Once all the conditions of your loan application have been suitably assessed by the lender, they will make their decision. If successful, you will be given an unconditional approval to borrow the funds.
5. Loan offer issued
Once approved the bank will issue loan offer documents to you.
This loan offer includes comprehensive paperwork to be read and signed. Again, this is where a mortgage broker comes to the fore. They will guide you through the reams of lending terms and conditions.
This offer document is extremely important. It details your responsibilities and the penalties for not meeting them. Make sure you fully understand what you’re signing up for with this legal and binding agreement. Don’t hesitate to ask for advice from your legal professional and mortgage broker.
Settlement occurs when you take possession of your property. Your solicitor or conveyancer will attend settlement on your behalf and, once complete, you will have unfettered access to your home.
Prior to handover, you will be given a settlement statement which sets out exactly how your borrowed funds will be distributed. Most will be to the seller’s account (normally to settle their own mortgage) while the balance will include any other professional costs or government charges.
The moment settlement occurs your loan comes into full effect.
But you are never on your own. Expect your mortgage broker to check in a few weeks after settlement to ensure your loan repayment processes are going smoothly and that there are no questions or problems that need addressing. They will also be just a phone call or email away whenever you need help.
Buying your first home and borrowing the funds seems challenging, but guidance from an experienced mortgage broker can ensure things run smoothly.
And then you should have an annual check in with your mortgage broker just to check that everything is on track and you still have the best loan and/or interest rate.
Always remember that your mortgage broker is there for you from the start of the process to the end and forever thereafter, so use them wisely and I’m sure you won’t regret it. If you are looking for a Melbourne, Sydney or Brisbane mortgage broker, we can help.
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