Thinking about buying?
Check out these little known facts about your finances to ensure you’re in the best position to be approved for your home loan.
Before you can buy or build a house, your finances need to be in top shape. How you look on paper really does affect your chances of getting a good loan. In order to make sure you’re looking your best for potential lenders, consider these five little known finance facts before you apply for a loan.
Your HECS can affect your borrowing power
Sure HECS is a low interest, government funded scheme with great conditions, but the fact is, it takes away from your weekly net pay. Lenders will definitely take this into consideration when evaluating how much they’re willing to lend you for a home loan.
If you’re looking to buy, now or in the future, do what you can to pay off your HECS as soon as possible. It will free up some of your money, which increases your budget. Your commitment to financial responsibility will also not go unnoticed by lenders.
Your credit card limits will be considered
Having a credit card and using it responsibly is a great way to establish a clean credit report. The banks also love a responsible credit user and will often throw higher credit limits your way to reward you for your financial savvy. But, before you take them up on their generous offers, consider how it will affect your chances of getting a home loan.
That’s right, credit limits, even if they’re unused, affect how much you can borrow. When looking at your credit file, lenders will assume that your cards are fully drawn. So, if you have a limit of $10,000 but you’re only using $1,000, you will be assessed on the full $10,000. It pays to keep your credit limits low to boost your borrowing power.
Watch your frivolous spending
You might be expecting a lecture about daily coffees and expensive avo on toast, but we’re not here to beat a dead horse. The truth is, as long as you’re sticking to a responsible budget that helps you save, you can spend your money how you like.
It is worth noting, though, that lenders can now access a very detailed account of your transactions and credit history. While the occasional splurge on breakfast isn’t going to mean much, excessive spending on anything will raise a few questions. If you’re splashing out too much in any one area of your daily expenses, be prepared to explain.
If you do want your spending to look more impressive, start cleaning up your transactions well before you apply for a home loan. And by ‘well before’, we mean a couple of years at least. As of 2018, more comprehensive reporting systems mean that lenders can see a full two years into your financial past when they pull your credit file.
Pre approval doesn’t guarantee a loan
Pre approval is an essential step in understanding how much you can truly afford. Your lender will look at your financial history and weigh up your debts and spending to figure out how much they’re willing to give you. It allows you to develop a concrete budget and make offers with confidence. However, pre approval is not approval.
Before your lender will grant your loan they must receive a contract and conduct a full review of the home to ensure it is a worthy investment. This generally involves a property valuation. If there are any issues at all with the valuation, the lender will likely pull out.
If your lender doesn’t decide to go ahead with your loan, you will need to speak with them directly. Find out the details around why they denied your loan and ask them what steps you can take to fix it.
You don’t necessarily need a 20% deposit
Saving a home loan is difficult. Even if you’ve pinched every penny and committed yourself entirely to saving up, it can be a long and arduous process. If you find yourself struggling to get over this initial home buying hurdle, you shouldn’t feel bad about it. Most first time buyers find it difficult to save up a full 20% deposit.
The good news is that you may not have to. If you have a portion of a deposit saved up, and you would otherwise be approved for a loan, lenders mortgage insurance may help you seal the deal. It’s an additional fee that will protect your lender if you default on your payments.
While lenders mortgage insurance can help you get into the property market sooner, you definitely need to do your research before making any commitments here.