There are a few simple ways to get ahead of the crowd when you’re asking the bank for a home loan, says Canstar general manager Jose George.
Your bank can conditionally approve you for a loan before you’ve found a house to buy. This is called home loan pre-approval.
Says Canstar general manager Jose George in a press release: “Pre-approval is by no means compulsory, but can be a very useful thing to have while you hunt for the perfect home.
“Not only will it make you more attractive as a potential buyer, it can make the process of finding and buying your new home go a lot smoother and quicker.”
What’s the process?
The process for pre-approval involves your lender checking your finances and deciding whether you’ll be able to successfully repay a loan.
If they’re happy that you can repay it, you’ll be granted pre-approval to borrow up to a certain amount. Most banks offer pre-approval which lasts for three to six months, giving you plenty of time to sort out the right home loan.
How to get pre-approved for a mortgage
Applying for a home loan can be stressful but there are things you can do to increase your chances of getting pre-approved for a mortgage.
Canstar has put together a list to help smooth out the application process and bring you one step closer to the Kiwi dream.
1. Review your finances
The first step in the home loan pre-approval process is doing some initial research into your finances.
Consider your income, your typical expenses, what assets you own and how much you owe. From there you can get a rough idea of how much you can afford to borrow.
A written budget can help you not only to work out your current income versus expenditure, it will help with tracking your spending against savings goals.
It also shows that you’re serious and capable of sticking to a plan. To get started, download a few months’ worth of bank statements, take a good look at where your money goes, and hopefully it’ll be clear where you can start making savings. An online budget calculator may also help.
2. Show that you’ve been saving
Lenders like to see that you have the discipline needed to make regular savings, so showing them you have a good savings pattern will give you an upper hand in the mortgage approval stakes.
Canstar’s first-home buyers research shows the level of evidence around savings history can vary quite significantly between providers.
For example, TSB Bank requires evidence of savings amounting to 10 per cent of the total loan, whereas Kiwibank, Westpac, ANZ and BNZ require evidence of 5 per cent of savings.
Evidence requirements also differ around how far back your savings history needs to go. Westpac requires proof of at least six months’ saving, but Kiwibank, ANZ, TSB and BNZ need at least a three-month record of savings.
3. Get on top of your debt
Any personal debt you have will reduce the amount the bank will lend you for a home. Try to pay off car and personal loans, and even credit cards, before applying for a mortgage.
There’s an additional warning with credit cards: try to stick to one card, and keep your credit limits low. Even if you don’t owe a cent on a card or cards, a lender could view it as possible future debt that you’d have to repay.
This could mean they’ll restrict the amount they’d be willing to lend you.
4. Don’t cancel your good credit card
This is a mistake that can catch people out. If you’ve got a good record of paying off your credit card balance in full, but are now focused on saving, don’t cancel your card. Just stick it in the drawer. That repayment history is giving your credit score a healthy glow.
5. Build yourself a healthy deposit
Once you’ve budgeted, cleared your debt and saved yourself a good deposit, you’re starting to look attractive to lenders. A ‘good deposit’ would be anything over 10 per cent of the value of what you want to borrow, but 20 per cent or more is better.
6. Consider the type of home loan you’re applying for
After reviewing your finances, you should also research the different types of home loans available. Fixed rate, floating rate, offset and revolving are just a few of the options.
Do your homework before you approach potential lenders, so that by the time you start talking to them, you already have a good idea which one will suit your situation.
7. Fill in the pre-approval application with a lender
Now you have a good idea of the sort of loan you’re after, it’s a simple matter of applying to your bank for pre-approval and filling in the paperwork.
Most banks let you apply online, over the phone, or in person at a branch. Your application will require some basic personal information to verify your identity – such as your name, address, and age.
Once you’ve sat down with your lender, they’ll assess your financial situation, including your credit rating.
Your credit rating is a numerical score that rates your ability to pay back credit on time, and it’s determined by your credit report, which is a record of your loans, credit cards and other credit products over the past several years, including any defaults or bankruptcies.
Once your lender has analysed your finances, they’ll let you know whether or not you’re eligible for the pre-approval you’ve asked for. If they think you’re capable of repaying a home loan, you’re likely to have your request granted.
Says George: “Pre-approval has several benefits when you are house-hunting.
“Firstly, it gives you a clear idea of what you can afford, but it also gives you the ability to put a genuine offer to the vendors as soon as you’re happy you’ve found the right property.
“It also demonstrates to the vendors you are serious and, if there are a few people interested in the property, it may just make you that bit more attractive as a buyer.
“In Canstar’s opinion, the home loan pre-approval process takes some time and effort to get, but it’s definitely worth it for the freedom and peace of mind it provides.”
First published 6 August, 2018
JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. This story reflects the views of the contributor only. Content comes from sources that JUNO considers accurate, but we do not guarantee that the content is accurate.