Waking up one morning and randomly deciding to hit the housing market is probably not going to directly result in your new home. Sorry if I burst any bubbles there. There is a lot to prepare for financially, particularly if this is your first step on the property ladder and a bit of planning will go a long way.
Your approval is based on more than just a reliable income and a big enough deposit. You also need to be able to prove your ability to afford your mortgage repayments. Potential lenders will ask for a recent transaction history of your accounts, so they can see possible red flags or signs of ‘money stress’. These red flags include things like excessive spending or frequently being overdrawn. They also want to see that you make regular deposits to your savings, and that you keep on top of your rent or bill payments.
So, with all of this in mind, how can you improve your chances of getting a mortgage?
There are a few things you can do, and they are…
Slow your spending
Before you start looking at mortgage options or making any applications, you need to have a good budget in place. You can use a spreadsheet or the Sorted budgeting tool to map out your income and your outgoing expenses. A well-planned budget helps to keep unnecessary spending to a minimum, ensure the bills are paid on time, and keeps regular contributions going into your savings accounts.
If you do all of these things, your accounts will be looking nice and healthy when the lenders do their checks!
Reduce your debt
Now might not be the time to apply for a new credit card!
Lenders will also consider your debt compared to your income, to get an indication of whether you can safely take on a home loan. If you are getting ready to buy a house, make a conscious effort to reduce credit card and personal loan debt to get it all down as low as possible. You could also look into debt consolidation for lower repayment options.
It is also not advisable to take out new personal loans or other lines of credit in the time leading up to making a home loan application, as this might be seen as a sign of financial stress.
Don’t worry about your student loan though. Student loan debt is incredibly common, particularly among first home buyers who are currently entering the market. Repayments are made automatically from your wages and lenders do not tend to view them as problematic. This is providing that there have been no previous repayment issues.
Check your investments
When it comes to getting your deposit together, your savings account and KiwiSaver are normally the key players. Or, your parents might be contributing money. It is also good to look at any grants you might be eligible for. Combining all of these tells you how much you have already, and how much more you still need to save.
Different lenders will have different requirements for deposits. The general rule is a 20% deposit, but it is becoming more and more common for lenders to offer low deposit loans of 10-15%. So, it is worth exploring your options if you aren’t quite at the 20% mark.
Talk to a trusted advisor
There is a certain level of hoop jumping involved in securing a mortgage. It can seem a bit complex and intimidating, especially if this is your first time going through the home loan process. That is why it is important to have a trusted adviser in your corner.
A financial adviser has insider knowledge on all the different options out there and can help you work out the best solution for your individual situation. While it can be tricky to navigate the waters of a mortgage, it doesn’t have to be hard.
Luckily, The Finance Marshall is here to help! Get in touch with us today to have a chat about your current financial position and how close you are to getting that dream home!