How to prepare for your loan application
Pulling together the information for a loan application can seem daunting, and may even feel a little invasive. If you’ve never applied for a loan before, gathering all of your most personal finance information – such as your credit card statement which reveals exactly how many takeaway coffees you’ve had this month – to hand over to a bank can seem daunting.
However, much like a trip to the doctor for a physical, a loan assessor has seen it all and chances are good that you’ll be well within normal spending parameters.
So, if you’re organising for your first loan application, it’s best to be prepared.
Here are six questions your lender will ask, and our best tips to ensure you’re ready to answer.
1. How much do you earn: This is an obvious one and easy for you to confirm. Gather digital copies or print hard copies of your pay slips. The pay slip should be no older than three months and should include a year-to-date figure paid. If you have an irregular income, a letter from your employer clarifying your renumeration arrangements would be an excellent addition to include. Additional income streams, such as rental income, investment or dividend income or foreign income will also need to be demonstrated with at least three months’ of documentation. This is the same for overtime and allowances, if these form part of your income, a minimum of 3 months history is likely to be asked for.
And if you are fortunate enough for your employer to pay you a bonus (or bonuses), then you will need a 2 year history of these for a lender to be able to verify this income.
If you are self-employed, then you’ll need to have your financial statements and personal tax returns at the ready for the last 2 years to be able to prove/verify your income from this source.
I know this all sounds like a lot, but being prepared is the key.
2. How much do you spend? The lender may ask for three to six months of bank statements for your transactional accounts so they can identify incomings and outgoings. You may also need to provide copies of utilities bills, and any other household costs, including phone bills, internet bills, gas, water and rates bills. Credit card statements for the past three months to be able to verify your “actual” living costs, so in the months leading up to beginning this process you have an opportunity to get those finances in order. Do you pay school fees? Regular vet bills? All of these will need to be accounted for with clear documentation. Don’t forget any insurance premiums you pay, along with private health insurance.
Lenders use different metrics to validate your expenses, they key is that these are realistic so a lender can see what your income is firstly, your living costs secondly and then be able to apply the balance of your disposable income towards your debt servicing.
3. What deposit do you have? The bigger the better. Ideally, you will have about 20 per cent of the house purchase price saved up. This is a good idea for a couple of reasons. Firstly, it will take a while to save that much, so you’ll have an extensive and solid savings history to demonstrate to the lender. Secondly, it will mean that you avoid Lenders’ Mortgage Insurance, a cost saving of many thousands of dollars. In reality, it is uncommon for first home buyers to have 20 per cent deposit saved. The minimum deposit is five per cent, but if you only have a small deposit the bank will take a very close look at all the other factors, such as job stability and security, spending habits and fixed expenses as well as your credit history (see our recent post here about steps you can take to improve your credit score).
It would be wise to have about 10 per cent saved. This would give you the best chances of a smooth approval process. Just a quick note on being gifted your deposit by a parent or other close relative – the deposit serves as a demonstration of savings success. If you don’t have a solid history of savings and are presenting a deposit that was gifted to you, the lender may need additional proof of being able to meet regular financial commitments. A three-to-six-month record of rental payments may suffice but be aware that some lenders will not consider loan applications where the deposit is gifted to the applicant.
4. Do you have any other loans or liabilities? Personal loans or other financial commitments must be disclosed. If you’re in a payment plan for previous debts, this should be disclosed with documentation of the repayment history. You must be open and up-front with your lender about all of your financial commitments when applying for a loan. Any loan accounts that are held, a lender will need to know what the outstanding balance is and the monthly repayments.
Credit cards – oh credit cards… credit card limits have a significant impact on your overall borrowing capacity. Sadly it seems that all too many people have either no idea how many cards they have or otherwise what their total limits are.
By not disclosing this correctly to a lender then it shows a lack of credit acumen and you are starting from behind the 8 ball right from the outset.
5. What loan features would you like included? This is your opportunity to consider things such as an offset account, a redraw facility, whether you want interest-only for a period, or the capacity to make additional repayments without incurring fees. There are many ways to customise your loan product to ensure it is the right product for you. A mortgage broker will be able to give you tailored advice that suits your particular circumstances.
Discussions around fixing your interest rate either fully or partially are also very important considerations.
6. Do you anticipate a change to your circumstances in future? If you are expecting a child, or planning to change jobs, thinking about moving, or expecting a relative to move in with you for a while – anything that can affect your financial position must be declared to your lender. Failure to do so could have a significant impact on your contract.
Meeting with the bank need not be a daunting event. Be prepared, have your documentation ready and be clear in what you would like to discuss. For that extra level of comfort, consider consulting a mortgage broker to enable their skill and expertise to assist you through these points. They will be able to talk you through all the steps required to get a home loan and can help boost your chances of success.
The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.