Feeling a bit nervous when it comes to applying for that all-important home loan?
The fact that you’re looking into how you can best prepare, means you’re off to a good start.
There are a bunch of different factors that lenders consider when assessing a home loan application, and it’s not all about a steady income and juicy deposit.
And yes, interest rates are super low right now, but lenders are acutely aware of this: they aren’t going to assess your ability to make your repayments based on current interest rates only. They want to test whether you could still cope, should rates increase.
To do this, they’ll need to take a good old look at your financial situation.
So, if you can do your best to show you’re able and committed to repaying that home loan, you’ll be in a solid position to get your application approved.
Here’s what you need to do…
It’s not all about (deposit) size.
While of course the size of your deposit plays a key role, and the healthier it is, the easier it’ll be to secure a home loan, there are other important factors that lenders will consider.
Savings is one of these. Lenders will look at your savings history and use this as an indication as to whether you’re able to make future repayments without any issues. If they spot significant spending, and little or no regular contributions to savings, it’ll be a red flag.
So, slow your spending as early as you can, and if you’re not already, set up regular transfers to your savings accounts. This’ll show them you have what it takes to pay back that debt.
Budget, budget, budget
And by this, I mean make one. A budget (aka money plan) shows you’re on control of your finances, that you know what’s coming in, what’s going out and how much you have left over. Lenders will appreciate this and use it to help make their decision.
(Of course, a budget is important, regardless of whether you’re applying for a home loan as it keeps unnecessary spending to a minimum, ensures bills are paid on time and keeps regular contributions going into your savings.)
Sorted has a great budgeting tool to get you started, or you can simply whip one up in an excel spreadsheet.
Check credit history
Lenders will check this, so make sure you’re aware of how it’s looking first. That way, if you do have issues with your credit history, you’re not caught off guard when lender’s query it.
Slash that debt
Any existing debt, like a car loan for example, may negatively impact your chances of getting your home loan approved. That’s because, to a lender, it shows you’re spending more than you earn, which gives them less confidence in your ability to repay their loan.
So, before you approach lenders, try your best to reduce credit card, hire purchases and personal loan debt as much as possible. If you have debt as well as savings, it’s smarter to use your savings to pay off debt – that’s because interest on debt is generally much higher than interest earnt on savings. Start with debt that has the highest rate and work your way down.
Lenders even prefer less options for debt, such as low credit card limits. So if you can, bring those down and show them your serious about saving, and you’ll be in a better position.
Student loans are the exception here. Lenders don’t usually see these as a problem (provided you don’t have previous repayment issues) as repayments are automatically deducted from your wage. So don’t stress about getting that paid down. Focus on reducing other debt and building your savings instead.
Get clear on your deposit
While (as I mentioned), it’s not all about the size of your deposit, it’s still important to understand what options you have to build it.
Other than savings (and any other contributions – such as from family), there are also potential KiwiSaver withdrawals to consider. If you’re a first home buyer, who’s been in KiwiSaver for at least 3 years, and intend to live in the property, you can withdrawal your contributions, your employer’s contributions, any interest you’ve earned and fee subsidies (if you got them).
You may also be eligible for the government’s First Home Grant, which may mean another $5,000-$10,000 added to your deposit.
Get (free) help from an expert
It can be tricky getting your head around everything that’s involved in securing a mortgage. But getting it right will not only improve your chances of getting your application approved, but save you a heap of money in the long term.
The good news is you can engage a trusted advisor to help. And the even better news: it doesn’t cost you a thing.
Here at The Finance Marshall, we deal with a range of lenders to save you time shopping around, and we know the interest rates and application criteria for different lenders, so can negotiate on your behalf. Plus, we can help you sort your loan application, and we often get better deals than if you approach lenders directly.
So, if you need a hand, get in touch and let’s get you sorted.
The Finance Marshall
0508 543 627