Answers to all your mortgage questions for first-time buyers
Getting a home loan can be an overwhelming experience, from choosing a mortgage broker and lender to sorting through all your other finances.
It can be difficult to know where to start and what all the jargon means.
Here are some answers to key questions about loans for first-time home buyers.
HOW TO GET PRE-APPROVAL FOR A HOUSING LOAN?
First, you need to decide who to get your pre-approval from.
Finspo co-founder and chief executive Angus Gilfilian said a broker can help you navigate the market and find the right lender for you.
You will need to gather your essential supporting documents to prepare your application.
Your broker should guide you through this process and will typically ask for the following:
- Identity documents and payslips for the last few months, or if you are self-employed, they will need your financial statements for the last two years;
- A statement of your outstanding debts and deposits; and
- Estimates of your major expenses such as rent and credit cards.
A broker will also help you submit your pre-approval request to a lender.
You can do all of these yourself, rather than using a broker, but they’re helpful, especially for first-time home buyers.
“If successful, your pre-approval is usually valid for three to six months,” Gilfilian said.
“You can usually extend by providing updated financial information. Otherwise, you will need to reapply.
WHAT DOCUMENTS DO YOU NEED TO OBTAIN A HOUSING LOAN?
Mr Gilfilian said lenders basically try to confirm three things about a candidate.
First, they need to confirm your identity, so a driver’s license or passport is required.
Second, they want to understand your current financial situation.
“In a nutshell, what you own and what you owe,” Mr. Gilfilian said.
“This includes assets such as deposits, investments, homes and cars, as well as any liabilities such as credit card debt, HECS debt or any other loan.”
Third, they will need supporting documents such as bank statements, payslips and credit card statements.
“They assess whether you can afford the pre-approval you are requesting. In other words, your income and your expenses,” Mr. Gilfilian said.
WHAT DO YOU NEED TO KNOW ABOUT YOUR CREDIT RATING?
Mr. Gilfilian says that if you are aware of any past defaults, it may be worth letting your broker know so they can determine which lenders will be most suitable for pre-approval.
WHO CAN BE YOUR GUARANTEE WHEN BUYING A HOUSE?
A guarantor is someone who adds an extra layer of security for your lender.
This is often done through equity in a property they own, known as a security guarantor, or sometimes through income support, known as a service guarantor.
“When someone becomes your guarantor, they’re agreeing to take on some of the risk if your loan repayments can’t be made for whatever reason,” Gilfilian said.
It should be noted that lenders vary regarding who can be your guarantor.
“Generally, lenders will accept parents, spouse or common-law partners, as well as close family like siblings,” Gilfilian said.
“Many lenders will not allow distant relatives or friends to act as a guarantor.”
WHAT IS A LOAN TO VALUE (LVR) RATIO?
The LVR is the value of your loan relative to the value of your property.
The higher the LVR, the higher the perceived risk to the lender.
“If you can get your LVR below 80%, that often means you can avoid having to pay mortgage insurance from lenders,” Gilfilian said.
“Often, the lower your LVR, the better deal you’ll have available to you from lenders.”
WHAT ABOUT REPAYMENT OF PRINCIPAL AND INTEREST VS. INTEREST ONLY REPAYMENT?
Principal is the amount of money you borrowed from a lender to buy your home and repay over time, known as the loan balance.
Interest is a percentage-based payment you pay to a lender to borrow money (the principal) from them. This is how lenders make money.
“A principal and interest loan pays off your principal balance plus the interest it earns,” Gilfilian said.
“Your loan will decrease over time with this type of loan.
“In an interest-only repayment period, you only repay interest. This means that your principal balance will remain unchanged.
“While repayments are likely to be lower at first, eventually you will need to start repaying principal.”