How Do I Get A Home Loan
In New South Wales most first home buyers do not have available more than $300,000, so with properties now close to reaching a median price of $1,000,000 they will have to take out a home loan to make up the difference. The home loan from the bank is combined with the funds available to pay for the new home purchased. Since the banks have specific criteria to decide who will be eligible for a home loan, it is recommended that the home buyer should apply for a pre-loan before spending time and resources on other home purchase activities.
Pre-approval for loans & Unconditional approval
The home buyer can get an indication of the amount which he can borrow from the lender based on his income, liabilities and debt. This is called conditional approval or pre-approval. There may be other conditions for getting a loan like providing the additional documentation required, or providing a valuation of the home being purchased. The definition for pre-approval will vary depending on the lender, so the buyer should check the exact definition with his preferred lender.
The pre-approval for a home loan can help the home buyer finalize his budget for the property. It should be obtained when the home buyer has decided to purchase a property, usually before bidding at a property auction or making an offer for the property. The home buyer should be aware that the lender is not obliged to give a loan to a person even if he has pre-approval.
Unconditional approval is obtained later in the buying process. To obtain this approval, the buyer will have to complete a formal application for a loan, and may have to provide additional details of the home, like insurance proof or valuation. After this approval is obtained, the documents for loan offer are given, and the loan application is processed.
Pre-approval process for home loans
Home buyers can visit the lenders branch personally or apply for pre-approval over phone or online. There are loan comparison services and mortgage brokers who can also help in the pre-approval process. The pre-approval is not binding on the lender if the conditions for lending or buyers financial status changes. Also the bank may not loan the pre-approved amount, and in some cases, not offer any kind of loan. There are calculators available to determine the deposit amount and the monthly repayments for home loans.
How do banks provide pre-approval for home loans
When the banks are loaning a home buyer money they are taking a risk, since the amount may not be repaid. Hence the bank will ask for certain information, especially financial details in the loan application to get a pre-approved loan. The lender will analyse the income, savings, expenses, debt and financial history of the loan applicant, to determine the overall financial health of the home buyer. This information is then used to determine whether the home buyer is eligible for a loan, and if yes, how much the loan amount.
If the loan is being approved for a specific home purchase, the bank will also try to independently assess the home value to ensure that the ratio of home loan and property value is below the range considered safe by the lender.
Income and expenses are also used by the bank to determine when the home buyer can afford to make the repayments of the home loan regularly. Income considered is the salary or wages and other sources of income like business income, investment income like dividends. Major expenses are groceries, transportation, utility bills and leisure activities. The repayment amount is considered at interest rate which may be up to three percent higher, to check whether the loan taker can repay the loan, even if interest rates will increase.
Banks are less willing to loan money to individuals who already have a large amount of debt. The debt considered includes business, car, student loans and credit card debt. Hence reducing the number of credit cards and their limits, repaying the other loans, will make it easier to get a home loan
Usually lenders prefer to lend to home buyers who already have enough deposits to make a large upfront payment – generally this is seen as 20% of the total purchase price. The home buyer should also have enough money saved, so that he can continue making the repayments, if the financial conditions change due to loss or job or increased expenses for children.
The lender will check the recent savings history of the loan applicant, usually the savings accumulated for six or three months. The lender will also check the credit history of the loan applicant, especially if there are any credit card or loan defaults earlier. Despite the default, the home buyer may get a loan, if he can provide a reasonable explanation for the default and how he will ensure that this problem will not occur in future.