Confused about home loan pre-approvals? Here’s everything you need to know before you start house hunting.
What information do you need?
First, your broker will want to build a comprehensive picture of your finances. To do this, you’ll need to provide evidence of everything including:
- pay slips and tax returns for your income
- title deeds for tangible assets (i.e. physical items such as buildings, machinery and inventory), and portfolio statements for intangible assets (non-physical items such as copyrights and patents)
- loan statements for existing loans.
- credit card statements showing your credit limit
- other financial obligations.
What happens at your first appointment?
At this initial appointment, your broker w ill confirm your identity and use your information to calculate an approximate borrowing figure. During this appointment, you’ll need to fill in a pre-approval application form.
How do you get approval?
Once you’ve chosen the mortgage, your broker will perform a credit check. The result of the credit check helps the lender determine whether you’re a suitable borrower and how much they should lend you.
When do you get approval?
Once the lender approves your application, you’ll receive a conditional approval certificate from the lender that is usually valid for 90 days. It’s important to remember that this is not approval for the actual loan. Use this figure to work out how much you can spend on a property, taking into account the size of your deposit and other expenses such as conveyancing fees, Stamp Duty and so on. Securing pre-approval will allow you to house-hunt with confidence. What happens next? When you’ve found the perfect property and you’re ready to make an offer, remember to tick ‘subject to finance approval’ on your offer before contacting your lender or mortgage broker to finalise the application process.
Understanding Your Borrowing Capacity
Being approved for a home loan is an exciting moment. But it’s important to understand your borrowing capacity before you commit to a mortgage. Just because you can borrow a certain amount, doesn’t mean you should.
Here’s how to assess your financial situation to understand how much you can borrow.
Consider your existing financial commitments
In principle, your borrowing capacity depends on a number of factors, including:
- your income
- your monthly expenses
- your existing debts
- how much deposit you have saved
- current interest rate
- type of loan
- whether it’s a principal, or principal and interest loan
- the term of the loan
- estimated repayments
As a general rule, it’s not a good idea to allocate more than 30% of your monthly household income to re-paying your home loan.
Put together a budget
The best way to know what your borrowing limit might be is to create a budget – and stick to it. Once you know w hat’s coming in and going out of your bank account, you’ll know how much you can afford to repay – and therefore how much you should borrow.
There are a number of different phone applications or websites that can help you put together a budget. When setting your budget, make sure you consider factors such as:
- council rates
- body corporate fees (if applicable)
- insurance costs
- maintenance costs
- utility bills
- estimated groceries
- medical bills and health fund payments
- school fees
- phone and internet costs
- petrol and transport payments
- entertainment, travel and clothing
- other loans or credit card debts
Think about the future
When putting together your budget, make sure you leave a bit of wiggle room in case things change. It’s important to understand how a change in circumstances will impact your finances. Anything from a hike in interest rates to an addition to your family w ill affect your ability to honour your financial commitment.
Talking to a mortgage broker can help you understand what you can and should commit to financially, but the final decision is yours to make.
Author: Alan Faint, http://www.hfcahobart.com.au/