Baby Steps - Preparing Your Finances For A Home Loan
It has always been the Aussie dream to own your own home. But first things first, how can you break into the homeowner market? And what does it mean to get your finances “in order”? Below are the first baby steps in preparing for a loan to help you get walking towards your own home.
Step 1: Know Basic Lending Requirements
Most major banks have pretty similar boxes you will need to tick to qualify for a home loan. If you get all of these together beforehand, it will speed up the application process and make your banker love how organized you are!
ID – This can vary from bank to bank, but typically it’s a 100 point check. This could include a drivers license, passport, proof of age card, medicare card, or bank card (TOP TIP: it helps if you already bank with the institution where you’re applying for a loan!)
Proof of Income – This one can be tricky because it differs depending on how you earn your income. For casual and part-time employees you may need to provide a year of pay-slips (beginning with your latest) or your last tax return. If you are full-time or salary you will need to provide your past three pay-slips. If you are self-employed (or if you run a business as well as other work) you will need to provide your tax returns for the past two years. If you have just started a new job and can’t provide the normal proof of income, talk with your broker to see what they will allow. In some instances an employment contract stating your wage may be sufficient. Also keep in mind that your bank may want to look at your financial statements so have them handy!
Proof of Residence – Be sure to have any rates notices, rent receipts, or tenancy agreements on hand in case your bank needs them!
List of your Assets and Liabilities – Yes, your bank will seriously love you if you put your assets and liabilities into a spreadsheet and list them. This helps them get a picture of your net position and if you pay loans on time (e.g. your car loan or credit card). Liabilities include any credit cards, personal loans, etc. be sure to list these with the current outstanding amounts. Assets include any cars, property, shares etc. and try to list these alongside their current value.
Personal Savings – Again, this helps even more if you are applying with the institution you already bank with (because they can see your savings history at a glance), but if you are applying elsewhere just provide them with the proof of your savings (e.g. bank statement). In addition to your 10% deposit amount, if you have saved more than 5% of the purchase price in personal savings, shares or term deposit, banks consider you more likely to pay off your mortgage and therefore have a higher chance of getting that big tick!
Step 2: Get a good look at your finances
Time to analyze your financial position. How much can you borrow? Have a play online with loan calculators and have a peek at what is in the market at the price point that suits you (this is the really fun part! So many exciting options and paths forward!).
Now you have an idea of what you want, it really helps to do a monthly budget of all your income and expenses to calculate how much you can save and if you can comfortably repay loan amounts. Templates for this are all over the web and spreadsheets often provide templates for you too. And surprise - your bank will want a look at this too when applying for a loan. If you haven’t already done one, often they ask you to prepare it before they process your application.
Step 3: Talk to a Finance Broker
If you find the world of finance all a bit overwhelming, or don’t feel like you can present your finances in the best possible way, talking with a trusted broker can seriously help.
Since a broker works for you and not for a bank, having someone who has a wide range of access to different lenders gives you more options when it comes to loan types and makes it all easier to understand.
A trusted broker will also educate you more about the technicalities and short and long term implications of having a mortgage. Those matters regarding finance that common people cannot comprehend, a competent broker can help you understand.
Another advantage of having a broker is the credible advice they give to put you in the right financial status to purchase. If you have a long-term plan or plans on investments, having a talk with an experienced broker will help you with your goals.
Step 4: Reflect on Your Credit Situation
Can you afford monthly re-payments? How much do you need to save to get better loan conditions? If you wait six more months and pay all your bills on time, will this make a large difference to your credit rating? How much longer will it take you to finally purchase, build or move into your new home (and are you happy to wait)?
These are all important questions to ask yourself before jumping in the deep end, but if at the end of all these baby steps, you feel confident and comfortable in your position, CONGRATULATIONS! You are now taking large strides towards owning your own home and living the Aussie dream.