Since the global financial crisis (GFC) struck on the back of the US lead sub-prime mortgage crisis, lenders have tightened their lending criteria.
So before you apply for a home loan it pays to do your research. Here's some inside info to put you on the right track.
Lenders have removed the availability of 100% loans, meaning you can no longer borrow the full amount of the purchase price. Instead, you normally have to prove that at least 5% of your first home deposit is from genuine savings.
So what is genuine savings?
Genuine savings is money that has been accumulated over of a period of time. The majority of lenders require savings to have been built up over at least three months.
Accumulating regular savings before buying is a great starting point as it will help you establish a steady savings pattern and prepare you for longer term mortgage repayments.
What counts towards genuine savings?
Lenders require you to provide evidence of your savings history in the form of bank statements – whether the money is in a term deposit, a savings account (such as ING or Ubank), or your everyday transaction account. Turning up with your piggy bank is simply not an option.
A share portfolio and/or any equity you already have in another residential property may count towards your genuine savings (depending on your lender) provided you have held these investments for a period of at least three months.
Funds held in your First Home Saver account will also count towards genuine savings. A First Home Saver account is a federal government incentive to give Australians a helping hand towards property ownership. It's not to be sneezed at!
What doesn't count towards genuine savings?
Financial contributions from parents do not count as genuine savings. Just because your mum and dad love you doesn't mean you are a responsible person who can manage a mortgage – which is what your genuine savings history aims to prove.
The First Home Owner Grant doesn't count. Again, a nice gift from the government, but it does not count as genuine savings. Neither do rebates from vendors or builders, the proceeds from the sale of assets (e.g. flogging your car) or money from a personal loan.
So, the moral of the story?
Particularly if you're a first time buyer, make sure you've got at least 5% of your expected purchase price saved for your home loan deposit and at least three months of savings history to back that up before you start looking for a property. It will save a lot of heartbreak by ensuring that you are in a realistic position to buy when you do find the home of your dreams.
Do you have a story to share about being knocked back by a lender because you didn't have enough evidence of savings, hadn't saved enough or weren't aware of the latest home loan approval criteria?