Insider secrets: here's how you can improve your chance of securing a home loan
With the median house price in Australia rocketing to $852,940* at the start of 2021, the dream of homeownership for those yet to get a foot on the property ladder may seem further away than ever.
The good news is that you can still come out ahead and achieve your dream of owning a home if you're conscious of the most common traps.
Tony Dao, lending specialist from homeloans.com.au, reveals insider tips to help you navigate a challenging market.
Have a discussion about credit
Before setting purchase plans in motion, buyers should be conscious of the impact a credit file can have on home loan applications.
Your credit file shows your financial history over the last five years and any loans you've applied for, including credit cards, home loans and buy now, pay later services. Tony suggests first home buyers obtain a copy of their credit file before applying for a loan.
"Be mindful that lenders use your credit file as a scoring system. Getting a copy of this before you apply for your loan can help you understand your financial position," says Tony.
Being aware of the actions that could affect their credit file is also something first home buyers should keep in mind.
"Applying for multiple loans, missing repayments, not paying bills on time or even having an overdraft on your account can lower the credit score on your credit file," says Tony.
Personal credit files can be easily accessed by contacting Equifax directly and requesting a free copy.
"Credit scoring is very common with a lot of lenders. By reviewing your file in all its merits, lenders can make a judgment on proceeding with a loan or asking more questions to understand how they can assist," says Tony.
Major lenders may immediately decline a loan if there have been too many home loan applications in the last six months or if there's a default on file.
If this has happened you, you should spend time improving your credit file, which will put you in a better position before applying for another loan.
A common mistake many buyers make is only factoring in the property's price tag when setting their budget. As a result, they can sometimes fall short when it's time to make an offer.
Fees such as those for conveyancing and legal, as well as building inspections in the lead up to a purchase must be considered as part of the overall investment. Stamp duty, which is a state government tax payable on certain transactions, should also be factored in, although most states have exemptions or concessions for first home buyers. Lenders mortgage insurance (LMI) may also be applicable if the deposit is less than 20 per cent of the purchase price.
"Being aware of all of the up-front costs ahead of time will help you set your budget appropriately, and understand the price range you play in before you start looking at properties," says Tony.
The deposit isn't everything
Softening the blow somewhat for the unexpected upfront costs is that it's not always necessarily to have a 20 per cent deposit to purchase a home.
"A 20 per cent deposit will certainly expand your choices in terms of securing a loan, but if you haven't saved to that level yet, you shouldn't give up. There are other options you can explore," says Tony.
Getting support from parents with a cash gift to supplement your deposit is an avenue that an increasing number of buyers are following, but it's worth bearing in mind that many lenders have restrictions around this.
"Most major banks and lenders require that deposit funds have been in the borrower's bank account for at least three months when they have less than a 15 per cent deposit, which means their purchase plans may be delayed if they're relying on any cash gifts, inheritances or first home owners grants."
For buyers who have less than a 20 per cent deposit, or who are relying on 'non-genuine savings', Tony suggests looking for specialty products that are specifically designed for first home buyers. Quickstart is one such product that supports deposits of as little as five per cent from multiple sources, like grants or the Bank of Mum and Dad, and also enables buyers to borrow a portion of the lenders mortgage insurance in their loan to reduce their up-front costs.
Quickstart provides much needed assistance to those faced with the challenge of saving a large deposit and can significantly increase purchasing power.
Put your best foot forward
A strong income doesn't necessarily mean approval for a loan. Lenders will assess overall financial position, taking into account assets and income, as well as any debts and liabilities.
"A lot of lenders look at your living expenses and count your one-off spends as a monthly expense," says Tony.
Tony suggests considering all options when it comes to credit cards. While it may not be necessary to cut them up, look at lowering the limit and make sure all existing debts are paid on time.
Showing consistent savings will also help present a financial situation in the best possible light, especially with less than a 15 per cent deposit.
Finally, Tony advises doing research into the whole application process before applying to have the strongest position possible and avoid nasty surprises along the way.
"Figure out how much you want to spend, the deposit you have available and what the end goal is. Be prepared to provide documents and have a look at your credit file to be in the best possible position before applying for a home loans," he concludes.
This information is of a general nature and does not comprise professional advice or product recommendations. Before making any decision about any investments, financial products and services, you should consult with your own independent legal, taxation and financial advisors, who can provide advice which takes into account your own personal circumstances, goals and objectives. *Source: Marsh, S. Australia's average house price hits record high as buyers flood market post-COVID [web article], 28 Jan 2021. 9news.com.au, (accessed May 2021).