Getting a home loan means you’re one step closer to buying your dream home. When applying, it’s important to be patient, organised, and prepared, but what exactly happens when you apply for a home loan?
What’s involved in getting a home loan?
Applying for a home loan means borrowing money from a lender to buy a house, and it’s something most people have to do. A lender will review your finances, check your affordability, and assess your credit score. They will also consider your deposit, as well as where it’s come from.
It’s vital to understand the interest rates and conditions of different home loans and how they compare.
1. Paperwork and documentation
When applying, you’ll be asked to provide documents that verify your income, assets, and creditworthiness. These are some of the most common:
● Proof of income
● Employment verification
● Bank statements
● Credit report (though lenders may get this themselves)
● Debt information
● Identification
Any specific requirements will depend on the lender and the type of home loan you’re applying for.
2. Affordability
Lenders use home loan stress tests, assessments used to measure your affordability. This is based on your financial situation and considers your income, expenses, and credit report. Key factors they will look at include:
● Income
● Expenses
● Credit history
● Employment history
● Debt servicing ratio
Using these and other details, lenders will work out how much you can afford and what your monthly repayments would look like. They will also take your deposit into account. Assessments can vary from lender to lender, so make sure you know what’s required when applying.
3. Deposits
Deposits are a crucial part of home buying, and the amount needed varies based on the type of home loan and the lender’s requirements. For first home buyers with a small deposit, lenders may offer a home loan with a higher loan-to-value (LTV) ratio.
Alternatively, some buyers may turn to a home loan guarantor, who is someone who agrees to pay your home loan if you cannot. You may even have family who are willing to help you with a gifted deposit.
4. Who can get a home loan?
Anyone who meets the lender’s eligibility criteria and can afford the monthly repayments can get a home loan. Different types of home loans may suit different people, depending on their specific needs. Adding someone to a home loan (such as a spouse or partner) is also an option, but it’s important to consider the implications that come with joint ownership.
Consulting a home loan broker is always recommended when starting the home buying process.
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Incentive schemes
Government backed incentive schemes can be helpful for first home buyers if they want to get home loan ready. Initiatives such as First Home Loan Deposit Scheme (FHLDS) and First Home Owner Grant (FHOG) are worth considering as a first home buyer.
What mortgage type is going to best suit you?
Choosing a home loan that best suits your circumstances will depend on your financial situation and long-term goals. These are some of the most common types:
● Fixed-rate home loans
● Standard variable rate home loans
● Rate-tracker home loans
● Interest-only home loans
● Offset home loans
Home loans and credit scores
Credit scores have a significant impact on a home loan application, as they’re one of the key factors a lender will consider during your application. As it’s based on your credit history and financial situation, it will affect the interest rate you’re offered.
A good credit score can help you get approved for a home loan with a lower interest rate, but it is possible to get a home loan with a bad credit score.
Applying for a home loan
Getting a home loan can be a complex and time-consuming process, but working with a home loan broker can make it easier and more efficient as they can provide you with personalised advice and guidance based on your unique financial situation and goals.
What happens if your application is denied?
Having an application denied can be frustrating and disappointing, but it’s important to acknowledge what played into the decision. Understanding this can help you improve your chances of approval in the future. Here are a few things you can do if your application is declined:
● Ask the lender for feedback and address any issues
● Look at other options like alternative home loans and other lenders
● Work to improve your credit
● Seek guidance from a professional
Ultimately, whether you’re buying for the first time or not, working with someone who knows the ins and outs of the housing market can be a massive asset in your home buying journey.