What you need to know before you apply for a home loan

By Gerv Tacadena

A man does some math as he assesses his home loan application.

If you are reading this, then congratulations – you are a step further to achieving your homeownership goals. By now, you might have already set your eyes on a property that you can imagine being your home. You may also have already talked to the seller of the property. Now, all you need is the power (and cash) a lending institution can give you to seal the deal.

A mortgage application may dictate the fate of your homeownership. While applications can feel hit-or-miss, there are surefire ways to ensure that your application gives you the best chance of having your home loan approved. The following questions will help you gauge if you are indeed ready to start this chapter of your life:

Are you currently employed?

The most important thing if you are planning to take on a mortgage is your source of income. Ideally, you will want to be currently employed at a position that you have already held for at least six months.

For contract workers, particularly Pay As You Go (PAYG) contractors, lenders usually require them to have spent at least 12 months in their current role to ensure that their contracts will be continuous.

Have you checked your credit score?

The next thing you have to worry about is your credit score. For lenders, a credit score represent how credible and responsible a borrower is with regards to their finances.

Your credit rating is based on several factors: payment history, outstanding debt, length of credit history, new credit accounts, and credit types. These things give lenders a detailed representation of you as a responsible or irresponsible borrower.

Here's a tip: at least twelve months prior to applying for a mortgage, make sure to settle your outstanding debts, avoid taking on excessive personal loans, and limit your credit card usage.

Do you have enough savings?

For some lenders, having a sufficient amount of savings indicate how well you are in handling finances. Borrowers who consistently save a portion of their monthly income in their bank accounts, time deposits, shares, or other forms of savings accounts, are more likely to get their mortgage application approved.

Your savings will really be beneficial in settling upfront costs like stamp duty, conveyance fees, and others.

Have you saved enough for a deposit?

Lenders do not usually let homebuyers borrow more than 80% of the total value of their prospect property. This is why it would be handy for you to save up and have at least 5% of the property value ready to go as your deposit. Needless to say, the larger the deposit, the better the chances that your loan will get approved.

A larger deposit will help you avoid paying significant Lenders Mortgage Insurance, or even paying it at all.

Can you afford the property you are eyeing?

It's never wrong to dream big, but when it comes to purchasing a property, be realistic! Lenders will often consider your annual income vis-a-vis the property value. If the value of the property is way beyond your capacity, your mortgage application will surely be denied.

This relates to the importance of your financial stability. Make a list of your monthly expenses and see if you still have enough space for mortgage payments. If you are currently renting, ensure that you are consistently on top of your living payments. Lenders will be looking into your lifestyle, particularly those parts that involve spending.

Your financial stability encompasses your employment, credit score, savings, and payment history -- banks will be delighted to provide you with the loan you need if you are financially healthy!

Have you organized your documents?

As with any other application, you will need to complete paperwork. It pays to prepare these documents early, as any missed steps may result in delays – not just in the loan application process but also in the property settlement.

Banks require documents indicating your identification, income, assets, and liabilities. These documents can include, are but not limited to, the following:

  • Personal IDs such as driver's license, passport
  • Statements of every bank account
  • Recent statements of credit cards, personal loans
  • For regular employees: recent payslips no older than two months
  • For contract workers and self-employed: Two years of tax returns

In addition to the documents mentioned above, you also have to furnish the bank with a copy of the contract of sale once your loan is approved.

It should be noted that different states have different rules when it comes to making the copies of the contract. For instance, only the front page of the contract is required in areas like New South Wales and Australian Capital Territory. Meanwhile, in Northern Territory, every page is required. Needless to say, it is best to ask your lender about their own standards, as well as the state specifications, of this requirement.

Can you do it on your own?

It is never wrong to ask for help. If you feel like it would be more practical for you to seek professional help in preparing to apply for a mortgage, go for it. The fee you pay may be worth the convenience of knowing that you've given your application another set of eyes.

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