Home Loan Approval Process Explained
6 min read
Getting a home loan and buying property can be daunting, especially when you’re not sure exactly how the process will work. There are many different ways of organising your home loan approval and buying property, let’s get started.
The first thing you need to do is find yourself a good finance broker. They will help you to understand how much you can borrow and what sort of deposit you’ll need. They can also help you understand whether you can utilise different government-funded programs and grants, Lender’s Mortgage Insurance and a host of other information.
There are over 40 banks, non-banks and finance providers in Australia, each offering different home loan products. This equates to hundreds of different options with varying features and fees and criteria. It can feel a little overwhelming, which is why working with a mortgage broker is a smart choice. They can quickly compare a range of options and make recommendations based on your individual circumstances including things like your occupation, credit history and income.
Establish your budget
Look at all of your bank accounts and make sure you are spending less than you earn. Sounds simple, but it’s a pretty crucial part of what the banks look at. Start looking at what you’re spending on eating out and entertainment expenses. We’d suggest cutting back on these from at least three or so months prior to your application and setting yourself a budget. Then make sure you stick to your new budget long-term.
Anything you remove from your expenses (whether recurring or sporadic), you should redirect to your savings account. Make sure you can show good financial habits. Are you paying for anything on a recurring basis you no longer use or need? Cancel them if you don’t need them, be brutal, it’s saving time!
Supercharge your savings
Maximise your savings by investing in high-interest savings and term deposits. Many people prefer to have savings in a cash account rather than shares or crypto so that they are easier to access and not subject to a sudden drop in value if the market experiences volatility. You can also pay down debt, such as credit cards or personal loans which will have an impact on how much you can borrow. Finally, if you currently have a home loan, having funds in your offset account or paying off more of the principal of the loan can help you boost your equity which in turn helps increase your options,.
Know your borrowing power
First things first you will need to save a deposit and understand what your borrowing power is. This then helps you to understand how much you can afford to spend when buying a property and what your future repayments may look like. Working with a mortgage broker is helpful here. They can provide guidance on how much a bank will lend you based on your situation, what deposit you will need to support the loan and of course, what repayments look like as interest rates fluctuate.
Getting a preapproval
The first thing a mortgage broker will do is complete a borrowing capacity calculator. This will indicate how much different lenders will be willing to lend to you based on factors such as your income, your assets and liabilities, whether you have dependents, your household expenditure and credit history. Some lenders do a computer generated pre-approval based on what your broker submits on your behalf and others will do a fully assessed preapproval providing better peace of mind.
Choosing your loan features
When you apply for preapproval your broker will discuss the different home loan features that are available and you’ll be able to decide what’s important for your situation. Before you begin searching for a property, ensure you have a preapproval in place so you can buy with confidence knowing you can afford the property you are inspecting. Here are some common features to consider:
| Fixed Interest Rate | As the name suggests, this is where you lock in a rate for a specified period (between one and five years). It interest rates fluctuate during this time, you’ll have peace of mind knowing your repayments will stay the same. |
| Variable Interest Rate | A variable rate refers to the interest being charged on your loan. A variable rate is subject to market changes, this means the bank can change your interest rate (up or down) at any time. |
| Principal and interest | Principal and interest refer to your repayment type. For most owner-occupied loans you’ll be required to make principal and interest repayments. This means you pay off the principal (your loan balance) and the interest charged. |
| Interest Only | Interest only is generally only available in certain circumstances. It means repayments only cover the interest charged on the loan, but is not paying down the loan itself or reducing your overall level of debt. |
| Redraw facility | A redraw facility on your home loan allows you to withdraw any extra funds you’ve put towards the loan at a given point in time. If you receive your tax return and decide to put $2K on your loan, then a redraw allows you to withdraw those extra funds from the home loan without needing to apply for a refinance as you are effectively $2K ahead of your repayments. |
| Offset account | Another option is an offset account. This is a transaction account linked to your home loan. Any funds you place in this account are offset against the amount you owe and reduce the amount of interest charged on the loan. You don’t earn interest on those funds, but you do pay less interest which means more of your repayments are going towards paying off the loan itself. |
House hunting
Now that you have your pre-approval in place you can begin the hunt for your property. This can be a challenge, aside from spending your weekends inspecting the property and all waking hours trawling online, it can be difficult to know what is a good property and what’s not.
Getting some advice here can be very handy, a buyer’s advocate is a good person to engage with to understand the area you are looking at and what things you need to be aware of when buying. They can also help connect you with properties that are not listed online anywhere, these are known as off-market properties.
Conducting due diligence
Once you’ve found a property, inspected it and have decided you’d like to buy it the next step is to have your conveyancer or solicitor review the contract. This is a very important step. It ensures the person selling the house has the right to sell it and gives you an opportunity to understand whether there are any material facts you need to be aware of.
It’s also your chance to have some important clauses added to the contract such as a finance clause and building and pest inspection clause. This means you are protected should you make an offer, only to find out later that the building is infested with termites or was constructed without council permits.
As mentioned earlier, there are many different ways of buying a property. We’ve outlined the most common here, but if you come across something different do get in touch with the Entourage team who can help guide you through what sale method is being used and how to handle it.
| Private negotiation
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Making an offer by private negotiation usually means you fill in the contract with the amount you’re offering, what deposit you have when the offer will expire and if it is subject to any conditions as discussed with your conveyancer. Once signed and sent to the agent, they will present the offer to the vendor. You may have an opportunity to make a higher offer if multiple parties are wanting to buy, this comes in the form of a best and final offer, meaning it’s your chance to put forward your absolute best offer for the property. |
| Buying at auction
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The most important thing to know about an auction is that the offer you make is unconditional. This means you won’t be getting a building and pest inspection or able to put a finance clause in place. Auctions usually start with an opening bid, and then those in attendance continue bidding on the property until there are no more bids. If the property is “on the market” which means the vendor’s reserve price has been met, then the highest bidder will be the new owner. If the highest bid doesn’t meet the vendor’s reserve then the property is passed in. A deposit must be paid on the day and the settlement date will be agreed on by all parties when the contracts are signed. |
| Other methods of sale
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Outside of these two main ways of selling, there are other ways agents can invite offers on a property. Expression of Interest (EOI) is where buyers submit their best and highest offer by a nominated date – the best offer with appropriate terms is then accepted by the vendor or the property may go back on the market. A boardroom auction is another way of selling and is essentially an auction with only the registered bidders in attendance either online or in person at the agent’s office. Finally, off-market is another method of sale, essentially a private negotiation between only two parties until an agreement on price is reached. |
Exchanging contracts
Exchanging contracts simple means both the buyer and vendor sign the contract of sale and are bound by the terms and conditions set out within. If you are getting a building and pest inspection now is the time to arrange this.
Unconditional home loan approval
Once you’ve made a successful offer on a property, it’s time to apply for unconditional approval. This is where the lender makes a formal loan offer and your contract becomes unconditional.
If you got a fully assessed preapproval then there are fewer steps to take here. You may only need to supply the contract of sale, and your latest payslips and get a valuation completed for the lender to be satisfied. Ultimately, the lender is simply looking to verify your income, your debt and your conduct to ensure you’ll be able to afford the loan now and into the future.
Once you’ve met all of the conditions set out by the lender they’ll make their formal offer and issue loan documents. After signing and returning this paperwork, your loan is unconditional and so is your contract. The next step is to wait for settlement day.
Organise insurance
Despite not being the owner, once your finance is approved you’ll need to organise home insurance from the settlement date. It’s also a good time to do a health check on your personal insurance too. If something were to happen and you could no longer work or make repayments on the loan, having a plan in place can help lighten that burden.
Pre-settlement inspection
Roughly a week before settlement you’ll go and complete a final inspection of the property. The purpose is to ensure the property is in the same condition it was when you signed the contract of sale. If there’s damage or there are chattels that were included and have since been removed, the vendor has time to rectify this before settlement occurs.
Settlement
The final step of the process is the settlement. This is when all the monies are distributed to each party such as the vendor, real estate agent, conveyancer and bank. It’s also the day the home loan commences. The most exciting part is that you are now the owner of the property.
On settlement day the lender will release the funds to the vendor, and your home loan commences. Repayments on the loan generally commence within 30 days and you become the proud owner of a new property.
Your broker will touch base with you periodically throughout the coming years – their job is to make sure you’ve got a great rate and suitable loan product ongoing too. They may contact your bank to ensure you’re always on a good rate or recommend a refinance if your current lender doesn’t remain competitive.
Entourage brokers are highly trained specialists, providing expert advice for lawyers and legal professionals and doctor home loans. If you like to speak with an experienced broker, contact us today.