Home loans are increasingly becoming effective medium to fund ones home purchase endeavors as one can finance as high as 80% of the total purchase price. Nevertheless, the overall exercise is not hassle free and involves its own share of challenges.
Keeping this in mind Square Yards presents certain key points, which if adhered to can certainly enhance the overall chances of effectively procure a home loan.
- Make sure to show ability to repay
Being able to show that one can repay a home loan is one of the key requirements for lenders. Although an institution wont want to see a written budget as such, they will want to explore current living expenses and financial commitments of the borrowers.
If the overall repayments are going to increase with the new loan, the lender would be interested in verifying the channels through which the borrower plans to meet the liability. For example, borrowers may be paying a high rent which would cease once they get possession of new home. They may also be investing in FDs or paying extra on their personal debt to pay it up sooner. All of these instances can provide solid evidence to the bank that they will be able to meet the repayments on the loan.
- Check your credit rating
Borrowers should make an effort to regularly check their credit report. This will give them an idea of how many times their report has been accessed in the past years and whether they have any defaults or negative repayment history recorded. Checking the credit report, before contacting a particular lender, would give the borrower an idea about their credit history earlier on. In case if there is anything on it that isnt correct, the borrower would have time to contact the company that recorded it, with the intention to get it corrected.
March 2014 changes to the Privacy Act means that lenders have the authority to see the last 24 months of a borrowers repayment history. Although it will take some time for these changes to be executed, but lenders should take the opportunity to make the required changes. Having late or missed repayments on any of the debts is not going to look good when one applies for a home loan. On the flip side, showing that one is diligent with the repayments will show the lender that it is a risk worth taking.
- Cut down on unnecessary financial commitments
Financial commitments and personal debt can impact application in two ways. Firstly, when originally applied for the debt there would have been an enquiry on the credit report. Too many credit enquiries can be detrimental to ones credit profile.
Secondly, the credit limits on all of the cards are included in ones repayments as if they are fully drawn. Credit cards, store cards, interest-free facilities and other personal loans can mean that one less surplus cash available to meet repayments on a new loan. Before applying for a home loan, review whether ones interest-free card or store card is still being used and if not, cancel them. One can also look to reduce the limit on your credit cards to help increase your borrowing power.
- Have a savings history
Showing that you can manage your expenses as well as save money is a big tick for lenders. When you are looking to borrow, Savings, serve two purposes. Firstly, the amount of money you put away each week or month can be used to meet your loan repayments. Secondly, your savings form part of your contribution to the purchase. The larger the contribution the less you need to borrow and the lower the risk you are to the lender.
If you are borrowing more than 80% of the purchase price, many lenders require evidence of savings. Your savings will need to add up to around 5% of the purchase price of the property to meet the genuine savings requirement of many banks. So on a $300,000 purchase your savings will need to add up to $15,000.
Saving a larger deposit may also help reduce or avoid fees like Lenders Mortgage Insurance, and potentially you could be offered a more competitive interest rate as well.
- Show that you have a safety net in place
Having adequate personal insurance is good advice, but lenders dont generally enquire about it. Most people do it for their own peace of mind and when they take out a home loan it is a great opportunity to review what cover they have.
A buffer of funds can help provide a safety net in case income stops. Most people either continue to save after they have taken out a home loan or hold back some of their savings to provide a buffer.
- Dont apply with too many lenders
Although it is important to compare lenders, if you submit applications to several different lenders at once these will appear on your credit report. Only submit an application after you have completed your research and have decided to go with that particular lender.
- Try to have employment stability prior to applying for a loan
Employment stability is important as this is generally the income that is used to meet the repayments. If the borrower have had the same job for several years, this is a big tick. Most lenders prefer borrowers to be with their current employer for at least six months and not on a probationary period.
If borrowers have changed jobs recently, then lenders will look carefully at what they did prior to the change. Being in a similar role in the same industry for the past two years can be used to satisfy the lenders employment requirements. Hence, borrowers need to be prepared to provide more information to prove a stable employment history.
- Disclose all information
It is important that borrowers discloses all relevant information when they apply for a home loan. During the process of due diligence, if the lender uncovers credit cards or other debts, which were not declared, then the loan may be declined due to non-disclosure because there could be questions about whether there are even further debts that havent been disclosed. Being upfront about any other issues can also help the application proceed more smoothly. It could help save time and effort, up front, ensuring that he is applying for the right loan.