First-home buyer’s guide: How to get a home loan

The money loaned by a bank is used together with your savings to pay for your new property.

Banks have specific requirements around who they lend to and how much, so it’s best to apply for a loan before going too far down the track so you know where you stand.

Pre-approval, sometimes also referred to as conditional approval, is an indication of how much you can borrow based on information about your income, debts and liabilities. It may also depend upon certain conditions, such as additional documentation, or a valuation of the property. Different lenders have different definitions, so you’ll need to confirm exactly what pre-approval means with your chosen lender.

Pre-approval can help you establish your budget, and should be arranged as soon as you’re serious about buying a property, and definitely before making an offer or bidding at auction. But even if you have pre-approval, a lender is not obliged to provide a loan.

Unconditional approval is different and occurs later in the buying process, normally after exchange. To receive unconditional approval, buyers will need to complete a formal loan application and may need to provide additional information about a specific property, a valuation or proof of insurance. Once unconditional approval is provided, loan offer documents are distributed and your loan application can progress.

Buyers can apply for pre-approval with a lender online, over the phone or in person at a branch. Buyers can also use a mortgage broker or loan comparison service to make the process easier.

Pre-approval isn’t binding and if your circumstances or lending conditions change, your bank might not loan as much, or may not offer you a loan at all.

When assessing a loan application, lenders will ask for certain information and examine your finances to determine the level of risk posed to them by loaning you money.

Lenders analyse savings, income, expenses, debt, and financial history to paint a picture of your financial health and decide whether you qualify for a loan, and if so, how much they are willing to lend.

When actually approving a loan for a specific purchase, banks will also assess the value of the property to ensure the loan-to-value ratio is within a safe range.

Income and Expenses – Income includes wages and any additional income such as dividends from investments or business income. Expenses include bills, groceries, transport and leisure.

Banks use these figures to determine if you can afford the ongoing repayments of a home loan. Repayments are assessed at two to three percentage points higher than the current rate to ensure you can make repayments even if interest rates increase.

Debt – This can include credit card debt, personal loans, car loans, business loans and student loans such as HECS-HELP. More debt means the bank will be less willing to loan as much, and reducing the number of credit cards and lowering limits will make you a more favourable applicant.

Savings – Not only do banks want to see that you have an ample deposit ready for your purchase, but enough surplus money available to continue meeting repayments if circumstances change, such as increased child raising expenses, or loss of employment.

Financial history – Banks also want to see a history of recent savings activity, with most lenders looking at savings accumulated and held for at least three to six months.

Lenders will also examine applicants’ credit history, looking for defaults on loans or credit cards in the past. These incidents aren’t necessarily deal-breakers, provided applicants can explain why defaults occurred and why they won’t happen again.

Originally published by Domain