April is traditionally a prime time for potential property buyers to hop along to a number of inspections in the hunt for a suitable purchase. If this is your plan, are you well prepared for the new home loan market?
Property investment can lead to financial rewards if clever decisions are made upfront. Along with researching thoroughly to find a profitable property, good investment decisions come from a clear strategy, meticulous preparation, careful comparison of finance options and securing a home loan tailored to your needs. Spending a good amount of time shopping around often leads to a bargain. The key is patience, understanding of short and long term requirements and knowing what is needed for loan approval.
In becoming more risk-adverse, lenders have tightened their policies around who they will lend to and how much. To help determine what loan options are available to suit your individual circumstances, it may be helpful to visit a reputable mortgage broker, who has knowledge of the approval criteria for a wide range of loans and lenders. They can assist in comparing lenders' interest rates, loan features, fees and service, and advise on the criteria needed to qualify for loan approval. Lenders have different benchmarks. Lender A may require a five percent deposit from genuine savings with six months evidence, while Lender B requires a 10 percent deposit.
Regardless, having a larger deposit or more equity to contribute means you borrow less and are therefore more likely to be approved. A number of lenders have now capped their loan to value ratios at 95% of the purchase price for homebuyers and 85% for investors. 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 $50k can borrow less than someone with a $5k limit, regardless of how much debt the credit card/s actually hold.
Furthermore, small blemishes in your credit history can reduce the likelihood of loan approval. A default on a car loan, credit card or even a mobile phone bill can leave a borrower loan-less. Similarly, each time you apply for credit, it may be recorded on your credit file, so it's important to investigate your creidt history in this respect before you apply for a loan. An experienced and knowledgeable mortgage broker will also help determine if you have a strong likelihood of being pre-approved for a home loan before you apply. Why is this important? Having applied for loan pre-approval – which many people take out before property hunting – may also appear on your credit record. So if you're likely to be rejected, it may be better to put off the loan application until you're financially ready, to avoid leaving a negative record on your credit history.
Here are further tips to help you gain loan approval:
- See if a family member can ‘gift' you funds to put towards the property purchase, to help build your deposit and perhaps allow you to avoid lenders mortgage insurance. Lenders will require a statutory declaration confirming the money need not be repaid.
- Be sure to have a solid employment record and don't expect overtime to be included if it is non-essential work (it may, but it is best not to expect so).
- To reduce the costs involved with purchasing property, consider sharing the commitment by buying with others you trust, eg. friends and family.
- Include on your loan application details of all your important assets eg. savings accounts, shares held, gifted funds.
- Again, be aware that there is a wide range of lenders out there. One lender may be much more likely to approve you for a loan than another. Do your research!
- Credit report factsheet: