Anyone looking to invest in the residential housing market for the first or subsequent time should go back to basics before applying for a home loan. Making the leap is an effort no matter how much experience you have, so below are some tips on how to make sure you’re well prepared and doing everything possible to achieve the best possible outcome.
By KRISTY SHEPPARD
I’m sure you’ve heard a lot of talk about the lending criteria screws being noticeably tighter since the global financial crisis, to the point where a significant percentage of Australians who would have been approved for a home loan previously are now being turned away.
In fact, I was talking to a real estate agent the other day who had been with his lender for 12 years while expanding his property portfolio. He’d never had issues, late payments or defaults, yet has just been knocked back for extra finance that he was sure would be approved.
In becoming more risk-adverse, lenders have tightened their policies around who they will lend to, for what types of properties and how much they’re willing to provide. Of course, having a larger deposit or a significant amount of equity to contribute means you’ll borrow less (depending on your goals) and are therefore more likely to be approved, but there are plenty of other aspects to consider.
No one wants their credit history to show multiple applications for credit made over a short period of time – a quick succession of applications noted on your credit file can make lenders wary and reduce the likelihood of loan approval. Investigate your history in this respect.
Some thoughts and tips for a happy home loan situation:
• Carefully research the market via traditional channels while embracing new media. Blogs such as this, online forums and social networking sites are a great place to ask questions and gather firsthand accounts of the pitfalls and benefits of today’s market.
• Set up a solid savings plan early on so you don’t feel overwhelmed or rushed to scrape together a deposit. Challenge yourself to save as much as you can within a timeframe; this will give you a clear goal post and help you to create a good savings habit (as will giving yourself a small treat here and there for staying on track).
• First-time investors may see if a family member can ‘gift’ funds to put towards the property purchase, to help build your deposit and perhaps allow you to avoid lenders mortgage insurance.
• You could also consider sharing the commitment by buying with others you trust, eg. friends and family.
• If you’re relying on equity from another property to use as security for your next purchase, be very aware that many lenders are more conservative in their valuations these days. You may not have as much to play with as you think.
• Be organised with paperwork. If you haven’t already, set up a folder to collect all of the documents you’ll need for applying for a home loan so when the time comes you’re not rushing around. Documents such as proof of identity, bank statements, recent pay slips or tax returns will be required, as will details about assets, liabilities and any other income.
• Seriously consider obtaining a home loan pre-approval before the property hunt. Having a good idea of your eventual loan amount, structure and repayments can save much disappointment down the track. An experienced mortgage broker will help determine the likelihood of being pre-approved for a home loan before you apply. As I mentioned earlier, that’s especially important because any credit applications will most probably appear on your credit record.
• Practice making the expected loan repayments before you commit to the loan so you’re sure you can manage them.
• Obviously, spending a good amount of time shopping around for a mortgage often leads to a bargain, just as it does when searching for the right property. The key is patience, understanding of short and long-term requirements and knowing what’s needed for loan approval.
• Also be aware that reducing your other debt commitments will probably increase the amount you can borrow. For example, someone with credit card limits totalling $50,000 can borrow less than someone with a $5000 limit, regardless of how much debt the credit card/s actually hold.
• Further, small blemishes in your credit file can reduce the likelihood of loan approval. Don’t be surprised if a couple of defaults on a car loan, credit card or even a mobile phone bill leave you loan-less.
• As always, be sure to have a solid employment record and don’t expect overtime to be included if it’s non-essential work. Many lenders have become stricter in this respect.
Please, be aware there’s a wide range of lenders out there. It’s not just about the big banks. That’s one of the reasons why 41 per cent of all new Australian home loans are written through mortgage brokers.
Kristy Sheppard heads up the Corporate Affairs department of Mortgage Choice, Australia’s largest independently-owned mortgage broker. She is the national publicly-listed company’s primary spokesperson and is responsible for its media, corporate, industry, government and investor communications. Visit www.mortgagechoice.com.au or call 13MORTGAGE.