17 February 2013

Home loans *gulp*

Finance freaks me out. Trying to sort out money stuff (whether it be tax returns, bills, HOME LOANS) just gets me into a complete tizz and the poor mister has to deal with me freaking out.

But I think the main issue lies with me not fully understanding how it works, and accepting that if things don't happen straight away, that there's always a solution.

So, I've noted down all the steps here to help me out - and hopefully, if you're reading this, it might help you out as well! Please note that all the below comments are just opinions and gathered information from the internet. If you are serious about taking on a home loan, please see a bank representative or a mortgage broker.

The home loan approval stages

Stage 1: Pre-approval

This is usually a very basic indication of your suitability to borrow an amount from a lender. This is in no way a binding agreement from the lender to actually lend you anything. (Note: we got pre-approval a couple of weeks ago, huzzah! Doesn't mean anything more than the paper it's written on, unfortunately...)

Stage 2: Conditional pre-approval

This is a relatively clear indication of a lender's intention to offer to lend you money for a property. It takes into account your personal financial situation but is not a binding agreement from the lender to lend you anything.

Stage 3: Unconditional approval

This indicates a lender's willingness to lend you a specific amount of money for a specific property given your personal situation. It's usually then up to you to decide whether to go forward.

Stage 4: Cooling off period

Details for this vary, and are outlined in your contract. Extensions to the period can be negotiated and are very common. Once the cooling off period expires you must either proceed or withdraw from the deal.

Stage 5: Settlement

Huzzah! The exciting bit. This is where your funds are paid to you, the sale is complete and the property is yours.

The criteria you need to meet for a home loan

So, all in all, looks pretty straightforward. But where it gets tricky is satisfying the lenders criteria to be able to borrow the money.

1. Residency status

You must be an Australian citizen or permanent resident living in Australia. If you are an Australian expats living and working overseas, on a spousal/partner visa, an overseas borrower and/or a temporary visa holder with stable employment, there are options but you'd definitely need to visit a mortgage broker or a bank directly to discuss this with them.

2. Proof of income

To be satisfied that you can meet regular mortgage repayments, you'll need proof that your income stream is adequate. Online calculators are a pile of rubbish - even if they are on the lender's web site, they are more focused on generating an inquiry than giving you accurate information.

3. Proof of secure, regular income

You need to prove that your income level is secure, which can can be demonstrated by your employment history. If you have recently changed to a similar job after a long stint in a similar position, that's fine but if you're on probation or have undergone a major career change, lenders may want to wait before allowing you to borrow. If you're self-employed or on a contract, lenders will review your past income.

4. Loan To Value Ratio (LVR)

If the bank is confident that you can service the loan, they will then consider the unlikely situation of you becoming unemployed, injured or on long-term benefits. They need to be satisfied in this worst-case scenario that they can sell your property for a sufficient amount to recover their loan. They obviously don't want to wait for 12 months for the market to improve and as such, they are usually comfortable with lending up to 80% of the value of a normal residential property. This is known as loan-to-value ratio (LVR). It is possible to increase the borrowed proportion up to 95% LVR for an owner-occupier if the lender takes out lenders' mortgage insurance, at a cost of between 1% and 5% of the property value paid for by you.

5. Savings history

Finally, if you are a first home-buyer or borrower who have no equity in existing property, mortgage insurers want to know if your savings history. If you borrow more than 80% of the value of their property to have genuinely saved at least 5% of the value of their property purchase. Genuine savings include money in savings accounts, share or investments (held for at least 6 months). They do not include first home buyers grant, a gift from parents, the sale of a car or any borrowed funds. While these additional funds can be part of your deposit they are not 'genuine savings".

The next couple of blog articles will explore LVR (Loan To Value Ratio) and LMI (Lenders Mortgage Insurance) in more detail, and outline how these impact on your home loan.


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