Home Loan Basics

 

Home loans are the backbone of the real estate industry. This is because most Australians need some form of financial assistance in order to purchase a house or property. Although the process of purchasing homes has been around for many decades, it is still a complicated process that has a considerable number of requirements.

What You Need to Apply For A Home Loan

There are a number of things you need to apply for home loans, including information that you might at first believe is not relevant. But consider that this loan is one that will arguably be the largest that you ever take out in your lifetime.

• Assets: Including vehicles, motorbikes, boats, and anything of large value
• Current and Previous Addresses
• Employment History
• Income & Investments

Basically, this is to establish your employment history to see if you have a good track record for holding jobs. This is a very important factor as standard home loans last for decades. You may also need a letter from your employer that states your status of employment with the company. If you are self-employed, then you’ll need to produce your tax returns for the past three years. 

Your current and previous addresses help verify your identity. Your assets list the items you have of value which demonstrates your ability to obtain vehicles and other valuables by paying off loans. Finally, your income and investments help detail your total net worth that is valuable in helping determine the interest rates. 

Your credit score is also important, but will be researched by the lender. Obviously, the higher your credit score, the more likely you will obtain a loan that offers lower interest rates. Keep in mind that different lenders may have additional requirements, so be sure to contact them first before bringing over the information to ensure that you have what they need. 

Additional Documentation Required For Home Loan Applications

It’s certainly possible that the list is incomplete in terms of what you need to provide a lender. You may also have to produce one or more of the following items;

• Credit Card Statements
• Application for First Home Owner Grant
• ID – 100 Points: Includes Passport
• 1^st Page of Sales Contract 
• Bank Statements: Going back Six Months
• Council Rates Notice for Your Properties, Including Investment Properties 

Keep in mind that if you are purchasing investment property, you’ll need to confirm the rental income generally through a real estate agency letter. 

Generally speaking, a lower credit card limit works for you in terms of obtaining home loans. So, if you plan on reducing the limit, be sure you do it at least seven days before applying for the loan so that it will show up in the records of the credit card company. The sooner you get a lower limit, the more likely it will appear on your statements. 

The rest of the documentation deals with those who have special circumstances that go beyond what a typical home buyer would need. Still, it is possible that lenders will ask for this information if it applies to your current status. 

Deposit Required for Home Loans

The deposit is the money you put upfront that helps reduce the cost of the home loan. Most home loans cover about 80% of the overall value of the property meaning that the buyer must cover the other 20%. Over the years, there has been a number of exceptions and differences in deposit amounts, but the 20% rule still generally applies depending on the lender and the overall value of the property itself. 

For example, if you find a property on sale that is noticeably lower than the market value, then you might be able to secure the home loans with a lower deposit. However, such instances are somewhat rare, so you should prepare by saving up the 20% needed for getting the property. The days of getting a 100% loan are long past for the most part. 

In addition, saving 20% or more for your deposit means avoiding having to pay Lender’s Mortgage Insurance. Having to pay this insurance adds considerably to the cost of the home, so if you can avoid making this type of payment you can save hundreds of dollars every year. 

Keep in mind that saving up for the deposit will reflect quite well in your bank statements which play an important role in getting approved. Plus, the more you save, the less your home loan will be which means that you pay less in the long run. 

Additional Costs of Purchasing a Home

Another aspect that you will need to be aware of is that your deposit and home loan will still leave a considerable amount that is not covered. The costs of purchasing a property includes, but is not generally limited to the following;

• Bank Fees
• Government Charges
• Legal Issues 
• Repairs
• Closing Costs & More

For the most part, you should consider saving about 10% of the total home costs so that you can cover the additional expenses. This is especially true if you are buying a home that needs some form of repairs or replacement that is not being covered by the seller. You may also find that legal issues will need to be addressed that will also add to the costs. Still, most of these fees and charges should be known to you in advance which is why having 10% of the total home cost in your bank account can save you from having to scrape up money later on. 

Also consider the indirect costs when it comes to purchasing property, such as its location. If it takes you further away from work, that is an additional expense. All of these additional expenses should be factored in to the purchase of the property. 

In the end, the home loans process is one that can be a bit tricky, but if you are well prepared in terms of the information that you bring, having a sufficient deposit ready, and putting back enough money to cover the additional costs, you can get through it without too much difficulty.

If you are in the process of looking for a home loan, why not browse through our Australian Home Loan Directory.