Not organising a pre-approval before going to auction is a massive mistake. Picture: Richard Walker
If you are a first homebuyer applying for a home loan, chances are, the odds are stacked against you.
Interest rates and property prices are both high – and then there’s the application process.
Mortgage broker, and former News Corp property journalist, Andrew Rennie from Helping Hand Finance said many first homebuyers inadvertently sabotage their chances at getting the best home loan available by making a series of mistakes when applying.
Luckily, with a bit of planning (and possibly a few spreadsheets), it is possible to present your best self to the banks and get the right finance for you.
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Many first homebuyers have the odds stacked against them. Picture: Sam Ruttyn
HOUSE HUNTING IN REVERSE
One of the biggest things first homebuyers do wrong, is look for a property before they organise their finance, Rennie said.
“They don’t know how much they can borrow or what their loan repayments would be,” he said.
So, it comes as quite a blow when they find out they can’t actually borrow the amount they need, he said.
Home loan specialist at First Choice Mortgage Georgia Bice said a lot of first homebuyers are “in for a rude shock” when it comes to finding out their borrowing capacity given today’s expensive market.
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Avoid loan application rejection by doing your research.
“If they’re single, have a little bit of a deposit and are earning less than $100,000 a year, I don’t even have to run anything through a calculator,” she said. “I can pretty much tell them they’re looking at a max purchase price of around $500,000-$600,000.”
It’s better to see a broker or the bank first to find out how much you can borrow before you even start house hunting, Rennie said.
POOR FINANCIAL CONDUCT
Most first homebuyers are willing to cut back on luxuries to help them pay their mortgage. The problem is, many expect to do this after getting the loan, when doing it beforehand will improve their chances at getting a good deal.
Poor financial conduct at the time of application can limit the number of banks willing to approve you for a loan, which means you may have to go with a lender that charges a higher rate, Rennie said.
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Having a pre-approval in place gives you better confidence when negotiating with agents.
“Like painting a house – the better the preparation, the better the end result will be,” Rennie said.
He said it’s best to cut back on spending six months before you make the application so you can show the bank you have enough income available to pay off the loan.
And remember – Buy Now Pay Later (BNPL) accounts, credit cards and HECS debts all affect your borrowing power.
RUSHING
Finder home loans expert Richard Whitten said not allowing the time to shop around for lenders often comes at a cost for first homebuyers.
“First home buyers are often rushing to settlement day and will take any lender that gets their loan approved quickly,” he said. “But if buyers take some time to research home loans before they sign a contract, and consider getting pre-approval, they give themselves more time and more options.”
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Helping Hand Finance mortgage broker Andrew Rennie.
POOR BUDGETING
It’s important for first homebuyers to understand that lenders will add on a 3 per cent buffer to the interest rate when assessing whether borrowers can afford a loan, Rennie said.
This is something borrowers should do too in order to help them judge how affordable things would be if rates shot up.
They should also factor in the running costs of the property, he said.
Whitten said it is important to be precise.
“It’s not very exciting, but it’s probably spreadsheet time,” he said. “After all, this is what your lender will do when they actually examine your application in detail.”
Mortgage brokers can guide you in the right direction when it comes to preparing your finances.
TOP FHB APPLICATION TIPS
Consider these measures to improve your application so you can present your best self to the bank.
1. Close unneeded credit cards and finance – It doesn’t matter if you max out all those credit cards every month or not, the banks will still see the total monthly limit as a liability and cut down your borrowing capacity
2. Run your own calculations – Factor in all running costs, plus the cost of your repayments and your usual living expenses so you know what you would need to cut back on to afford the loan if interest rates go up
3. Speak to a broker early on – Seeing a broker will give you dozens of lenders to choose from, some of whom may waive LMI for certain occupations. A broker can also show you how to demonstrate good financial conduct and improve your deposit-saving power in the lead up to getting a loan
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