The home loan application process can be quite intimidating, especially if it’s your first time entering the property market. While there are a few steps involved, it isn’t too complicated. This guide will tell you everything you need to know about how to apply for a home loan.
What is a Home Loan?
A home loan refers to the extra funds a person agrees to borrow from a bank in order to purchase property. The home loan, also known as a mortgage, makes up the difference between the initial deposit (usually 10-20% of the purchase price) and the purchase price of the property. A home loan is a financial agreement to pay back that money over a certain period of time.
A home loan will be for a set amount of money, but the bank will charge interest on each repayment. Interest refers to a percentage of the funds that the borrower has to pay back on top of the funds that they borrowed.
Your home loan has not been secured until you are given final mortgage approval.
How to Apply for a Home Loan
One of the most important tips to help you prepare for your first home loan application is to have all the required documentation prepared beforehand, to reduce wait times and increase your chances of being approved for a loan.
Requirements for Home Loan
There are a few different forms of documentation that you will need to prepare to apply for a home loan, including:
- Proof of Income
- Assets & Liabilities
- Extra documents
If you have a primary form of identification, such as a passport, driver’s license or proof of age card, you can use this. You could also use two forms of secondary ID, such as a birth certificate, citizenship certificate, medicare card or debit or credit card in your name.
Proof of Income
You will need to prove that you have a stable income that is unlikely to be suddenly revoked or altered. The documents that you will need to present will differ depending on whether you are an employee, self-employed or earning money from a rental property.
If you are an employee, you will need to present two or more recent payslips, an employment contract or statement from your employer. You could also present 3 months worth of bank statements showing your income.
If you are self-employed, you will need to present evidence of your business and personal tax returns for the past two years.
If you earn your income through a rental property, your real estate agent will need to write a letter confirming your income. You may also need to provide other documents to support this.
Assets, Liabilities & Expenses
You may need to provide documentation that lists anything that you own (e.g. cars or investments) as well as anything that you owe (e.g. credit card debt). These are your assets and liabilities.
Evidence of your expenses might include presenting bank statements, household bills or credit card statements.
You may need extra documentation depending on your personal situation. For example, if you’re purchasing your first home, you may wish to fill out the First Home Owner Grant application. You might also need to provide the details of your insurance policies.
When to Apply for a Home Loan
You can either apply for a home loan before finding the property you would like to purchase, or after.
If you apply for a home loan before finding a property, you will be given what is called ‘pre-approval’. Pre-approval is not the same as final approval, but it can be helpful in a number of circumstances. Pre-approval can give the borrower an idea of how much they might be able to borrow, so that they know whether or not a property will fall within their price range. Pre-approval might also be necessary if you are planning to bid on a home at auction. The bank will issue a formal statement that outlines the conditions of the pre-approved loan.
You can also apply for a home loan after you’ve found the property that you wish to purchase. Most real estate contracts will include a ‘finance clause’ that gives the buyer some time to obtain and settle a home loan. The risk with applying for a home loan at this stage is that if your loan is not approved in time to meet the requirements of the real estate contract then you may lose any deposit that you had already paid.
Where to Apply for a Home Loan
You can either apply for a home loan directly through a bank, or via a mortgage broker. Both of these options have their own advantages and drawbacks and the best choice will depend on your individual circumstances.
Bank for Home Loan
Applying for a home loan directly through a bank may give you more control over your options, because if you do your research thoroughly you can find the best loan and lender for you. However, if you don’t have the time or resources to shop around for the ideal service, you may be limiting your options by applying through a lender.
Banks can only offer their own home loan options and are not required to provide competitive interest rates or tell you if there is a more suitable option elsewhere. Many of them also require you to submit your documents in person rather than online.
Mortgage Broker for Home Loan
Applying for a home loan via a mortgage broker may give you more peace of mind, because they are required to work in your best interests. They also have access to and expertise about a wider range of policies and options from a variety of financial institutions so they may be able to suggest a product that you otherwise wouldn’t have considered. Mortgage brokers do not usually charge fees from borrowers and often provide the option to submit documentation online.
Home Loan Application Process
Applying for a home loan can be quite a lengthy process. Each phase will require specific considerations, which will be explained in this section. The steps in the home loan application process include:
1. Things to consider before applying
2. What you will need for home loan application
3. Loan application
4. Pre-qualifying for a home loan
5. Preliminary approval home loan
6. Conditional approval home loan
7. Valuation of property
8. Lenders mortgage insurance
9. Loan approval
10. Issuing loan offer
11. Home loan settlement
Things to Consider Before Applying
There are a few things that you should assess yourself before applying for a home loan. First of all, you should consider your own financial situation. Have you saved enough money for the deposit and do you have a steady stream of income? Many lenders will require a 20% deposit, however, some will accept a smaller deposit if you agree to pay lenders mortgage insurance (LMI). This is an extra premium on top of the price of the home that ensures financial protection for the lender if you are unable to pay back the loan. You should think about whether or not you will need to factor in this extra cost.
There are a few different types of home loans that you will need to research to make sure you understand your options. You should consider what kind of interest rate will suit your needs (fixed or variable) and whether or not you will require any home loan features (such as a redraw facility or an offset account).
What You Will Need for Home Loan Application
You will need to prepare a number of documents for your mortgage application, including:
- Proof of identification
- Proof of employment/income
- Evidence of your assets, expenses and liabilities
- Insurance details and any other extra documents (such as a grant application)
See above for the specifications for each item.
This is where you will need to decide whether you want to apply through a mortgage broker or go straight to a lender. If you decide to contact a mortgage broker, they will need to discuss your circumstances and your needs with you before assessing the documents you’ve collated.
Pre-qualifying for a Home Loan
If you’re planning on applying directly through a lender, you may wish to fill out an online form to get an idea of how much you’ll be able to borrow based on your income. If you’ve already contacted a mortgage broker, they’ll be able to calculate this for you.
Preliminary Approval Home Loan
At this point you will need to submit an application to a lending specialist. You can do this over the phone if necessary. You will not need to submit supporting documents at this stage. If you are in contact with a mortgage broker they will arrange this for you.
Conditional Approval Home Loan
In order to receive conditional approval, you will need to provide all your supporting documentation; including proof of your identification, income, assets, expenses and liabilities. The lender may also run a credit check to check your credit score and credit history.
Even if you receive conditional approval, you have to notify the lender of any changes in your financial circumstances before receiving final approval to purchase a property.
Valuation of Property
After you have been granted conditional approval, the lender will arrange for a valuation of the property you wish to purchase. The lender will usually outsource this, so the timeframe for this step can vary.
Lenders Mortgage Insurance (LMI)
Whether or not you need to pay LMI is dependent on the size of your deposit. Generally, if you pay a 20% deposit you will not need to pay this premium. However, if your deposit is less than 20% a mortgage insurer will calculate how much your LMI will be. This cost will usually be added on to your mortgage.
You will receive final approval or formal approval when the lender confirms that you meet the lending criteria and that you should be issued the loan. You will receive an official letter stating this approval.
This process will take longer if any additional documents are required or if you need lender’s mortgage insurance.
Issuing Loan Offer
After you have received formal approval, the loan offer will be issued to you. You will need to sign the loan contract, which you may want to go through with a solicitor. You should return the contract to the lender once it has been signed.
Home Loan Settlement
At the settlement stage, your representative will arrange a meeting with the lender, relevant credit provider or representative of the seller to finalise all of the documents and transfer the property ownership to you. The money will be withdrawn from your account and paid to the seller.
After everything has been settled, you can pick up your keys.
What Happens After Settlement?
You will usually need to start making repayments one month after settlement. Your lender will be in contact with you to make sure you understand how and when to make the repayments.
You should review the terms and features of your home loan every 12-18 months to make sure you’re still getting a good deal. If your circumstances have changed or if the features of your home loan are not competitive with other products on the market, it might be time to refinance. Refinancing your home loan might seem unnecessary, but it can save you money in the long run.
Ongoing Home Loans Support
You may wish to seek advice on:
- Whether or not your interest rate is competitive and manageable
- What other loan products are available
- Whether or not you should switch to a fixed or variable interest rate (depending on what you already have)
- Any fluctuations in the value of your property
- Making any changes to the frequency of your mortgage repayments
You can consult a mortgage specialist to discuss these questions.
Home Loan Auction with Joust
Joust offers borrowers the opportunity to take charge of their home loan by connecting them with lenders and brokers through a live auction feature. Borrowers can put their mortgage on auction so that lenders bid for their business and borrowers are able to choose the best home loan rate.