Are There Special Home Loans For First Home Buyers?
First home buyers are eligible to apply for the same home loans as other customers. Lenders often have 'special offers' they market as home loans for first home buyers, however they may not be the best deals available. Some special offers lock you in to staying with a lender for a number of years, and the low interest rate offered may only be for an initial period of time, it may increase significantly after that initial period. This is where a home loan broker can help you, mortgage brokers like us can review hundreds of loans from many lenders and present you with a range of home loan products that best meet your needs and preferences, often with better rates than the 'special offer' home loans for first home buyers that are out there.
What Does It All Mean?
Deciding to buy your first home is a huge step, and it can be quite daunting. The home loan industry is full of abbreviations and terminology you've probably never heard of before. Our Guide To Commonly Used Lending Terms can help you with any wording or abbreviations you're unsure about.
How Much Money Do I Need For a Home Loan?
The amount of money needed for a home loan is known as your deposit. This amount includes a percentage of the purchase price plus your costs such as your legal fees, building inspection and any stamp duty you need to pay.
The minimum deposit required for home loan applications with most lenders is 10% of the purchase price of the property, plus your costs. However there are some lenders who will allow a minimum deposit on home loans for first home buyers of 5%. Contact us to find out which lenders may be able to help you.
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What is Lenders Mortgage Insurance
Any deposit lower than 20% of the purchase price will result in Lender's Mortgage Insurance (LMI) being payable. LMI is an insurance policy you pay for, to cover the lenders in case you don't make your repayments and the property has to be sold. LMI is usually added onto your loan amount so that you do not need to pay for it out of your deposit. LMI does not cover you the borrower, it only protects the lender and provides no benefit to you. So LMI is best avoided by contributing a greater deposit or having a guarantor. The higher the deposit you can contribute, the less the LMI will be. If you can pull together a 20% deposit LMI is not required.
What Are Genuine Savings?
If your deposit is less than 20% the lender will want to see evidence that some of your deposit is 'genuine savings', which means you put money aside regularly and your account balance increased over time. Be careful where you save your deposit, most lenders will not consider a deposit saved in someone else's account or in a business bank account to be genuine savings. A print out from your real estate agent showing your regular on time rent payments can help your application, but rent payments are not considered to show genuine savings. If you can contribute a 20% deposit or more most lenders are not concerned with whether your deposit is 'genuine savings'.
What is an LVR?
The Loan to Value Ratio (LVR) is the amount of the loan you are seeking divided by the value of the property.
Loan Amount ÷ Property Value = LVR
Lenders prefer an 80% or lower LVR home loan however contributing such a high deposit is not always possible for borrowers. Most lenders will not consider higher than a 90% LVR home loan and there is no lender who will consider above a 95% LVR home loan.
What Can I Afford To Borrow
In addition to your deposit, lenders consider a number of other things when assessing your borrowing capacity including your; Income, Expenses and Stability.
Firstly they will look at your income, while income from permanent full time or part time work is preferred by lenders, there are lenders who will consider income from self employed applications and from casual work, bonuses, commission or employees and whether you are on probation. If you are returning to work after time away, such as for maternity leave, most lenders will be understanding of a pregnant pause in your employment.
Secondly the lender will look at your expenses including; payments for other loans, credit cards or store cards and daily living expenses. Even if your credit or store cards have a zero balance as long as the account is open the lender must include the minimum repayment for the credit limit of that card as an expense, because you could spend up to that credit card limit at any time. This can be detrimental to your application and reduce how much you can borrow. You will be asked to provide a list of your daily living expenses with your home loan application. The lender will look at these expenses and work out if they seem fair for your situation, a family with three kids should have higher expenses than a single person or couple with no kids. The lender will often cross reference these expenses with the bank statements you provide, so don't try to fudge the figures.
Stability is a factor that lenders consider when assessing a home loan application, this is because a mortgage requires your commitment to regular repayments over a long period of time. You won't find much about stability as a factor in the credit making decision, it's effect on an application isn't something tangible, and there is no calculator for assessing it. What we do know is that an applicant who has had the same job for 3 or more years and lived in the same residence for 3 or more years will be looked upon more favorably than an applicant who has had several jobs and moved around the country several times all within a few years. Lenders want to know you're going to stay employed and stick around to make your repayments.
Find out how much you can borrow
Contact us to find out more about what you need for a home loan.
Mortgage Pre Approval
Before you start looking at properties or making offers, getting Pre Approval is a great way to have some assurance from a lender that you can borrow the loan amount you are seeking. Pre Approval is also referred to as Approval in Principle (AIP) and Conditional Approval. The pre approval loan process firstly involves contacting a home loan broker like us, or a lender directly. Home loan pre approval requirements will include providing details of your deposit, income, expenses and the sort of property you want to buy including the suburb or region and the maximum purchase price you may spend. Based on the information you provide the lender will let you know if they would approve a loan. An approval in principle is not a guarantee, but it is a good indication that provided you meet the conditions listed, you would receive formal loan approval. Conditions listed on an Pre Approved Home Loan may include things like; a satisfactory property valuation is required by the lender once a property is found, or additional evidence of your income and expenses are required.
Mortgage Borrowing Capacity
While you save your deposit there are things you can do to improve your home loan borrowing capacity, and assist your chances of getting a home loan when you are ready to apply. Trying to increase your income by upping your hours or going for a promotion is an obvious way to improve loan borrowing power, as the more you earn the more you can borrow. However, keep in mind that it can be significantly harder to get a loan if you have just changed jobs and are on probation or have changed from permanent work to being casual or self employed. If you are in casual work you could try to move to a permanent position. Apart from increasing your income, you can work on lowering your expenses. Have a look at your accounts to work out what you are spending and what you could cut back on or negotiate lower rates on such as your phone or internet bills. If you don't use all your credit or store cards you may want to consider if you could close some of them, because even if their balance is nil the lender must allow a monthly repayment for them in case you spend up to limit on them.
How Does the First Home Owners Grant Work?
The government grant for first home buyers offers reduced stamp duty to purchase a home and a grant to build or purchase a new home. The first home owner grant available in each state and is for people who have never owned property before. Your conveyancer or solicitor can lodge to the first home owner grant application for you, the grant is paid or exemption of duty made at settlement. The most up to date information about the grant is available through the links here from the government website in your state.
Does the First Home Buyers Grant Count Towards a Deposit?
You can put the first home owner grant towards your property purchase. However, as you do not receive the money until settlement it doesn't form part of your 'genuine savings'.
What is a guarantor?
If you don't have enough deposit, or you want to avoid paying Lenders Mortgage Insurance (LMI) it is possible to offer a guarantor instead. This means that another person, such as a parent, offers their property or money in a term deposit, as security for your loan. In a guarantor arrangement the lender will usually take security over the property you purchase and the property or term deposit belonging to your guarantor. Once your property has increased in value or you have paid down your loan enough, you can apply to release the guarantor from the agreement. In general you can apply to release a guarantor when the LVR is 80%, that is when your loan amount represents 80% of the property's value.
Asking someone to be a guarantor is a big deal, don't be surprised if even your parents say no. This is because while the guarantee is in place there is a risk to your guarantor, and they must receive independent legal advice when they sign the guarantor agreement for you, because if you don't pay your mortgage your guarantor is liable for your loan. If you have no deposit guarantor home loans are presently the only option to obtain a home loan.
How can a Cash Back Mortgage Broker help me?
While the prospect of saving a deposit, finding a property and taking out your first home loan can seem daunting, Cash Back Mortgage Broking can help you on your first home buying journey. If you have any questions about home loans for first home buyers that we haven't answered on this page please contact us and we will be happy to have an obligation free chat to you.
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