Applying for a home loan can be a daunting and nerve-wracking process, especially if it’s your first time. To avoid any unpleasant surprises, there are some basic principles to be wary of when applying for your home loan.
The five C’s
How well you rank in these five categories will make or break your loan application:
- Credit history - Understandably, lenders want to make sure you can pay back the money you borrow. So, a clean credit record is a definite plus if you want a fast loan approval.
- Capital - refers to your accumulated assets.
- Collateral - closely related to capital, refers to the property or other valuables that can be used as a security.
- Capacity - quantified by factoring in your current income and existing debts into a proposed loan repayment strategy. An important aspect of capacity is a measure of your job stability, which can be assessed by looking through your employment history, length of individual jobs and respective salaries. There are a couple of golden ratios to keep in mind. For example, your housing costs should not exceed 35% of your gross income and all debts should be below 45% of that income.
- Character - encompasses all of the previous C’s as well as other factors like the industry you work in, how long you’ve been living at your current residence and more.
The first step toward home ownership is preapproval. So, it is important to understand the different types of prequalification involved - conditional pre-approval and unconditional pre-approval.
Unconditional pre-approval is the best option as it is the most streamlined loan process. Paperwork is pivotal for having the best chance of securing unconditional pre-approval. The more written evidence you can provide that proves you are a creditworthy individual, the better. Income slips, bank balances and any other information that shows the source of your down payment should be provided in an orderly fashion.
Luckily, even big banks are partnering with online lending institutions, for example ING Direct, so all of this can be done easily online.
Beef up your credit history
If you have any concerns about your credit history, ask your broker to review it. Some brokers will not do this in the preapproval stage but it costs nothing to ask and having a clear insight into your credit history will give you the best chance of securing a favourable loan.
If you don’t have a credit history, you will need to take steps to show lenders you have a solid credit score. This means having and using a credit card for some time before making your application, as well as any evidence of current personal loans.
Just having a credit card is not enough, how you use it is also very important. Frugality and responsible spending habits are key. Be sure to avoid lavish and unnecessary purchases as these will adversely affect the amount of credit you can qualify for.
Another red flag for lenders is if you have recent history for changing jobs. As a rule of thumb, try avoiding job changes within six months of applying for a home loan. This might not apply to all industries, however, if you can prove the change is a natural career progression.
According to the Australian Bureau of Statistics, the number of first time home buyer commitments is on the rise, with a strong growth trend. This increase is in large part due to various first home buyer incentive programs. Be sure to have all of your bases covered and take advantage of local incentives in your area. Be patient and prepared.