LOOKING FOR AN ESCAPE PLAN? 7 STEPS FOR MAKING IT WORK
Are you one of the millions of people in lock down in NSW or Victoria, feeling trapped in a small apartment with rowdy kids, or with housemates that are driving you crazy? Fed up with the uncertainty? Well, you’re not alone!
A recent article in realestatecom.au reported a rise in sight-unseen sales on the Gold Coast , as interstate home buyers prepare to flee to sunnier Queensland where life is looking a whole lot more normal. One agent reported their agency is selling one to two properties a week sight unseen!
If you’re considering the big move north, a closed border is no longer proving a deterrent to determined home buyers. But what might stop you is your ability to get a loan that matches your new home dreams
Purchasing a new home is exciting! But applying for a home loan, even if you’ve bought property before, can be intimidating. It’s understandable if you are finding it hard just to identify that first step you need to take, let alone seeing the big picture, when it comes to what can be a complex and frustrating process.
Would you play a game of footy without knowing the rules and understanding the game? You can, but your chances of winning are low. Applying for a home loan is no different.
Many people also fail to realise that, just like a footy game, a successful home loan process starts well before you apply for a loan and extends well after you’ve purchased your new home.
Read on to learn the 7 common steps for a successful home loan process – from whoa to go.
1. GET FINANCIALLY PREPARED
You’ve probably already deep dived into real estate sites such as www.realestate.com.au. By now you should have a fair idea of what you’re looking to buy and how much you’re willing to spend.
Just like a footy player, the sooner you start your preparation for the big game, the better.
Answer these important questions.
How much deposit do I need?
There are no-deposit home loan solutions available, however if you want to maximise your chances of successfully getting a home loan with favourable terms and conditions, you’re probably going to need a deposit.
You will normally need to save at least 5% of the sale price to buy a house. For a $500,000 loan, a 5% deposit equates to $25,000, which is far less than you might have imagined. If you manage to save 20% of the deposit you usually won’t need to pay the one-off lenders mortgage insurance (LMI). LMI is a one-off fee used by lenders to mitigate their risk if you borrow less than 20% (in most cases). It is calculated as a percentage of the property and can vary between lenders, and can add up to 5% to the price of a home. But paying LMI isn’t a bad thing if it means the difference between you missing out or scoring your dream new home. The time taken to save the extra deposit might also mean missing out on significant increases in the value of your property, especially in the current fast-moving property market.
Don’t forget to check out what first home grants might be available that, if you’re eligible, will significantly drop the amount of time needed to save for a deposit.
Don’t forget all the other costs involved, including stamp duty, LMI, legal and conveyancing fees, finance and insurance costs and other professional fees such as building and pest inspections. Other costs to consider include utilities, moving costs, council rates and strata fees.
What’s my credit score?
Aside from saving for a deposit, the most important thing you should do before even starting to think about putting together your home loan application, is to review your credit score. When you apply for a home loan, one of the first things your lender will do is check your credit score and pull a copy of your credit report. But do you even know what these are? And if you do, do you know what is in your credit report?
Your credit score is the number that lenders use when deciding whether to lend you money. It is calculated based on the information in your credit report. Your credit report contains information about your financial history including your personal details, credit accounts you’ve applied for, current credit limits in use or any accounts you’ve defaulted on. Your credit report is one of the most important financial records you have. It shows how risky you are as a borrower, and therefore how likely it is you’ll be approved for a loan. Any black marks or errors in your credit report could reduce your chances of getting approved.
The good news is that the Fix Bad Credit team are expert at spotting issues in your credit report and getting them fixed. If you have any concerns, get in touch, as we offer a free credit assessment and consultation, providing options for improving your credit score. We can then work on improving your credit score while you save your deposit. Putting you in a strong position for getting approval for that home loan once you are game fit!
Who’s in my dream team?
Did you know that more than 60% of home loans are now written by brokers (versus going direct to the bank)?
With so many different lenders and home loan options out there, it can be overwhelming to know what one might be best for you. A mortgage broker specialises in helping you find the home loan that best suits your specific needs and circumstances. Once you have selected a home loan option, they then assist with the application process. A good mortgage broker will also continue to work with you for the life of your loan, regularly reviewing your loan terms and conditions, and identifying opportunities for you to improve them. If you are self-employed or a contractor, your loan application will be more complex and a mortgage savvy broker can navigate you safely through these added challenges.
Other pros of using a mortgage savvy broker. They will:
- Fully explain the financial process of applying for a home loan
- Work out what you can afford to borrow (your borrowing capacity)
- Understand your property goals and help you achieve them – both now and in the future
- Explain various loan products (fixed, variable), what they cost and what features are available (offset, redraw)
- Save you hours of research and frustration in identifying the lender that is most likely to approve your home loan, before you apply.
There are usually no direct costs involved in working with a mortgage broker, as typically they receive commissions from lenders for every loan arrangement. However, they are legally required to work in your best interest or risk incurring fines in excess of $1 million.
You should check your broker has access to at least 20 lenders, including a mix of banks and non-bank institutions, to ensure that you have a large pool of options to choose from when shortlisting the ones that will suit you best.
It is always important to do your own research before agreeing to use their services, however we can provide you with a list of mortgage savvy brokers for you to consider from our extensive list of contacts.
Now’s a good time to start looking for a solicitor or conveyancer (called a settlement agent in WA). A conveyancer provides advice and information on the transfer of ownership of the property, as well as assisting you through the buying process. They can cut through the legal jargon and red tape associated with buying a home and take some of the stress out of the process. They’ll organise all the appropriate documentation required for settlement, communicate with lenders and provide advice where possible. It’s a good idea to use a conveyancer who is local to the property you are purchasing. They will have a better knowledge of local authorities and any planned developments in the area that could impact on your purchase.
A solicitor can provide the same services as a conveyancer, and additionally can provide advice on property law matters or assist with tax, and should a legal dispute or issue arise during the settlement process they will be able to help. They could also cost you more than a conveyancer.
2. GET HOME LOAN PRE-APPROVAL
It’s common for most people to seek a pre-approval from their lender before looking for a property to buy. Having a home loan pre-approval means that your mortgage has been pre-assessed by a bank. This ‘conditional’ approval is valid for 3-6 months depending on the lender.
By getting a pre-approval, you know whether or not your personal situation meets the bank’s lending criteria and you get an accurate idea of how much you can afford to spend on a new home. Knowing your price range means you can spend your time looking at properties you can realistically afford.
It also gives you the confidence to make an offer on a property, and in a competitive environment the seller has confidence that someone with pre-approval is serious and ready to buy.
However, just be aware, a pre-approval doesn’t guarantee you a full mortgage approval. In many cases your pre-approval application isn’t fully assessed by the lender and they are under no obligation to formally approve your loan when you find your property. So, if you are buying a house by private sale, make sure you sign conditionally based on full approval. If you are buying under auction, ensure that the bank has given you full unconditional final approval before you sign anything. Otherwise, you risk losing your deposit.
3. CHOOSING YOUR PROPERTY
Congratulations, you’ve been pre-approved, now it’s time to go shopping!
There are many factors to consider when buying a house. Are you a couple? Do you have children or are you planning to? Do you want to be close to work or school? Will you need public transport? Do you want to be near local cafes? It’s important to have a clear idea of what you’re looking for, otherwise you can spend a lot of time searching and not go far.
Start with a checklist of your non-negotiable “must haves” but go in open-minded.
Also consider if there are plans to develop the area and improve infrastructure, potentially increasing the saleability of your property in the future, when you’re ready to upgrade to your next home.
You’ve found your dream home. Before you get too attached, make some important checks, including for signs of mould or damp spots, sagging ceilings or floors, cracks in the walls, water flow.
Technology has made it easier if you’re house hunting from interstate with online photos and virtual 3-D walkthroughs, and if possible, have a family member or friend look through the property on your behalf to check for signs of mould or damp spots, sagging ceilings or floors, cracks in the walls, water flow.
If you are sure you want to go ahead, get a qualified pest and building inspector to make an assessment. They will be able to detect structural defects, pest infestations, faulty wiring, plumbing and drain issues, asbestos, lead paint, and more. If the pest and building inspection comes back with issues you can either choose not to proceed or use it to aid in your negotiations over the price of the property. You can always negotiate to have clauses written into a contract to protect yourself if you have concerns
4. MAKE THE OFFER
Before you enter into negotiations to purchase a property, it’s smart to have a good idea of its market value. You can research using an online valuation service or else get a registered valuer to undertake a comprehensive property valuation. Your mortgage broker may also be able to arrange an upfront property valuation from your lender which is often free. Be aware your lender is likely to put a low value on the property to cover their risk.
When you are confident that you have found the property that suits your needs and your budget, you are ready to make start the negotiations. Contact the agent and let them know how much you’re willing to pay.
If the seller accepts your first offer, the agent will send you the contract of sale. The contract of sale confirms the selling price as well as terms and conditions. You should then review the contract of sale with your conveyancer (or solicitor). Your conveyancer will look for any potential errors or red flags in the contract, will carry out all the relevant searches and also prepare all the relevant settlement documents. A lot of people don’t know this but when you purchase property, any debt or liability on the property will be transferred to you once it settles in your name if you don’t do your due diligence. The conveyancer’s job is to protect you by undertaking the relevant enquiries and ensuring the relevant adjustments are made at settlement, ensuring you don’t inherit any of these issues.
It can be easy to make an expensive mistake, so don’t let the agent pressure you into making a decision unless you’re comfortable you’ve done all your due diligence. Make sure you understand what you are committing to before you sign on the dotted line and if you only have conditional pre-approval from the lender ensure there is a finance clause included in case they change their mind.
Once you have exchanged contracts, you will need to cough up the holding deposit, which works as your bond until settlement. If you get last minute cold feet you can still cancel the contract during the cooling off period, which is a specified period of time that varies from state to state, but you may be required to pay a penalty. You can always ask for a longer cooling off period if you think you might need more time or need an extension to get your finances in order. Auctions do not have a colling off period.
5. GET UNCONDITIONAL LOAN APPROVAL
Once your conditional offer has been accepted, your broker will forward a copy of the signed contract of sale to your lender. If you don’t already have a property valuation, arrangements will be made for this now.
If the result of the valuation is fine and other loan terms have also been met, the lender will grant full unconditional approval for the home loan. Your lender will also expect you to insure the property as soon as you exchange contracts, to protect their investment, otherwise they may not lend you money.
Your broker and conveyancer will now arrange for the property to be transferred into your name and make sure the settlement takes place within a specified period (which typically takes 30 to 90 days).
6. MOVE IN!
You are now a homeowner. No more being surprised by rent increases or having to ask your rental agent for permission every time you want to hang a picture on the wall.
Don’t forget to transfer the address on all your accounts and organise for mail redirection and to get any required movement permits!
7. UNDERTAKE REGULAR FINANCIAL HEALTH CHECKS
It doesn’t end here.
Life happens and circumstances change. It’s important to regularly review your home loan to make sure it still suits your needs.
Have interest rates changed?
Do you know what rate you’re being charged on your home loan? Don’t pay the lazy tax by failing to regularly check your interest rate against any current offers. You may find that a five-minute call to your lender to request a home loan health check will save you tens of thousands of dollars in interest repayments over the term of your loan.
Is your fixed rate term coming to an end?
In most cases, once your fixed rate term ends, you’ll automatically be rolled over to an applicable variable rate loan, which could be a lot higher than when you first got the loan. It pays to contact your lender beforehand to discuss your options.
A good mortgage savvy broker will also offer a regular review of your home loan to ensure you are keeping as much money as you can in your pocket.
If you plan to ask your lender to review your home loan terms and conditions, they are likely to recheck your credit score to check that you are still in a good position to repay the loan. Keep in regular contact with the team at Fix Bad Credit, who are happy to regularly review your credit report to check there are no new issues that might need addressing before you approach your lender.
If you’re struggling to meet your repayments because of other priorities, for example if you’ve recently had a child, been through a divorce or changed jobs, get in touch with the team at Fix Bad Credit who offer a free finance health check, and can identify options to help you out.