The home loan process
Your home loan journey mapped, from application to settlement and beyond.
Whether you've found your perfect home or are just beginning your search, your home loan will be a big part of your journey. If you've never applied for a home loan before, the process may be entirely unfamiliar. Knowing what happens at each step along the way can help take some of the stress out of your first home loan and make sure you're on track to purchase your property.
The first important step in the home loan process is to compare your options. There are thousands of home loans out there from hundreds of providers. This can seem a bit daunting, but the upside is that there's likely to be a home loan suited to your situation, no matter how unique.
You'll want to compare home loans on their interest rates, their fees and their features. Educate yourself about some of the common types of home loans, some of the features they include and the structures that might work best for your situation.
Comparing home loans will help you find one suited to your circumstances, and will ensure you're getting the best deal possible. A savings of a few tenths of a percent can make a difference of thousands of dollars over the life of your home loan. It's worth taking the time to compare.
Once you've found the home loan you think is right for you, it's time to apply. The home loan application process is relatively straightforward, though you will need to provide some documents and source some information.
Lenders will want to know about your employment. They'll want to see that you have a stable source of income and that you've been in your current job for at least 12 months. If you're self-employed, they'll want you to have been operating your business for at least two years.
Lenders will want to know about your financial situation. This means they'll need to know your income, your assets, your expenses and your liabilities. If you're a PAYG employee, proving your income will be relatively straightforward. If you're self-employed, you may have to provide a bit more documentation.
Lenders will also want to know about the property you're buying. They'll want to see that it's a type of property that they feel comfortable accepting as the security on a home loan. In other words, they want to know that in the worst case scenario if you default on your home loan, they'll be able to sell the property to recoup their losses.
You may be asked to provide a variety of documents through the application process. A few of them will include:
- Bank statements
- Credit card statements
- Personal loan statements
Once you've applied, your application will move to the pre-approval stage. This usually takes 2-3 business days, though some lenders can offer pre-approval the same day you apply.
Pre-approval is a lender's indication that pending further documentation and review, they would be willing to lend you a certain amount of money. This is a valuable step because it gives you an idea of your borrowing power, and hence your buying power.
If you're still searching for a property, home loan pre-approval can give you a serious edge. It shows vendors that you're serious and that you can move quickly should your offer on a property be accepted or should you win at auction.
However, it's important to remember that pre-approval doesn't constitute a binding agreement to lend you money. Your lender is only indicating in principle that they would lend you a certain amount.
After you've gotten pre-approval, your home loan will move toward full approval. At this stage, the lender will want to know more information about the property you're buying.
To reach full approval, you'll need to provide a copy of the signed contract for the property you're purchasing. The lender will then conduct a valuation of the property if one hasn't been done already. This lets the lender know how much the property is worth, and dictates the loan amount your lender is willing to offer you.
At this stage, your lender may also undertake further credit checks and review of your documents. You could be asked to provide more documentation. You'll also need to get your building and contents insurance sorted at this point.
Once your home loan is fully approved, you'll receive your loan offer documents. Once you have signed and returned these, you have agreed to accept a specific loan for specific terms.
Settlement is the process of the lender funding your home loan, paying the vendor and exchanging signed documents. After this stage of the process, you've officially bought your new property and will take possession of the keys.
At settlement, your lender will pay the vendor, the solicitors and/or conveyancers and any fees and government charges. If you have to pay stamp duty, it will usually be paid at settlement.
To prepare for settlement, you'll need to make sure you have enough money in your account to cover these costs. This means covering any shortfall between the home loan amount and the costs at settlement. Your solicitor or conveyancer will usually provide you a sum you'll need in your account at settlement.
Once you get through settlement, you're ready to move in and begin repaying your home loan.
Once you've moved past settlement, you'll need to settle into making your regular home loan repayments. If you've budgeted well and stayed within your means, this shouldn't be an issue. However, sometimes the unexpected occurs and you could find yourself facing hardship.
If you do have trouble making your home loan repayments, the first thing to do is contact your lender. Make sure you do this before you've missed a repayment.
Lenders have hardship programs to help you manage in the event of financial difficulty. They may be willing to lower or pause your repayments for a period of time while you get your feet back under you.
Remember, it's in your lender's best interest to work with you on a plan to get you back on track. The important thing is to communicate the moment you're facing hardship rather than waiting until you've missed repayments.
Once you've moved in and started making your repayments, it's important not to get complacent. The home loan market is dynamic, and lenders compete fiercely for new business. A great rate now might not be so competitive a year from now.
It's a good idea to compare home loans every 12 to 18 months to make sure you're getting the best rate. If your interest rate is no longer competitive, it's time to call your lender to ask for a better deal. And if your lender isn't willing to negotiate, it could be time to refinance. A bit of work refinancing can save you thousands over the life of your home loan.
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