Buying your first home can be confusing. We’ve answered some frequently asked questions to help you get started.
1. How much can I borrow?
Before you even begin looking at properties, it can be helpful to find out how much you are able to borrow. This will help you narrow down your search and choose a property that’s within your budget limitations. There are many factors that are taken into consideration when calculating the amount you could borrow, including your existing debts, your income, your savings and expenditures. A home loan calculator will give you an indication of how much you could borrow and what your repayments may look like, but pre-approval will provide you with a more accurate figure.
2. How long does pre-approval last?
Home loan pre-approval is a formal assessment from a financial institution of how much you can borrow based on your circumstances. It is usually required before you make an offer so the seller knows you have your finances in order and are serious about buying the property. Depending on the lender, pre-approval usually lasts for three to six months. If you don’t make an offer during this time, you’ll have to go through the process again. To gain pre-approval, you will usually have to provide a range of documents to validate your information, including ID, income, assets and savings.
3. How much deposit do I need?
Generally, you will need a deposit of 5-10% of the property value in genuine savings, which means money that you have saved over time. This figure is then subtracted from the purchase price of the property to give you your loan amount. If your deposit is less than 20%, you may also incur the cost of Lenders Mortgage Insurance (LMI). A Family Guarantee can help reduce the amount of money you need to save and avoid costly LMI by using the equity in a family member’s house to guarantee your loan, but there are some risks involved that you will need to weigh up with your family member.
4. What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is a protection for the financial institution when taking security over a mortgage. It is insurance to offset any loss that may be incurred if the loan is not repaid. It may apply for a higher risk loan or when lending more than 80% of the property value and could cost you thousands of dollars extra depending on your loan amount. The cost will be included in the total amount of your loan.
5. What documents/proof do I need to apply for a loan?
While applying for a home loan might seem daunting, it’s mostly just compiling a range of documentation required by the lender. This could include proof of identification, details about your wage and income, a record of your savings and any debts you may have. Take a look at this handy checklist for a more comprehensive guide. All lenders are different, but it won’t cost you to apply for a loan if it doesn’t get approved.