First Time Home Buyer Guide

How Do You Know You’re Ready to Buy a Home?

On one hand, buying a home is a smart financial move. You can put your hard-earned dollars towards growing your own wealth with a high value asset. Also, let’s be honest, entering the property market is a sort of rite of passage in our culture. It’s an exciting time when we set down our financial roots and starting building upwards – or at least that’s the idea.

On the other hand, a home purchase is probably the biggest financial investment you’ll make in your life. It’s a huge responsibility and one you need to make sure you’re prepared for.

So, how do you know you’re ready?

Here’s a checklist for home buying readiness you can use to decide:

• You have a clean credit history – no late payments or overdue accounts for at least six months, although more than a year of flawless credit is preferred
• You’ve worked in your current job for at least six months
• You can afford the mortgage payments because your income is high enough in relation to your expenses – you can use our Borrowing Power Calculator to get an idea of what you can afford
• Your personal debts like credit cards or an auto loan are minimal
• You’ve been depositing money into a savings account in your name
• You could comfortably pay for home repairs
• You’re at a place in your life where you’re ready to settle down
• You have a large enough deposit ready

For a lot of first time home buyers, the deposit is the most challenging part of being ready for a loan. You may have excellent credit and a stable income but if you haven’t been saving money to use as a downpayment for your home loan, you could be in for a big surprise when you go to apply.

How Much Do I Need to Pay for a Deposit and Fees Before Applying?

The size of your deposit will dictate how much you can borrow. It will influence the interest rate you are eligible for. It will determine whether you have to pay Lender’s Mortgage Insurance (LMI) or not. And, it will have a huge impact on whether you can qualify or not.

Australian housing prices have started to come down from their recent high, but they’re still up there. Median house prices reported at the beginning of 2019 were well over $400k in every major metro area, from $420k in Hobart to $840k in Sydney.

That means, even with a small deposit of 5% of the purchase price for a modest-priced home at $420k, you’d still need $21k for the deposit, as well as costs like stamp duty, conveyancer fees, and other expenses.

• Conveyancer fees – budget for at least $1,500.
• Other loan charges like the mortgage origination fee, title search, and the application fee – budget for at least $1,000.
• Stamp duty – this varies by state, property type, and whether you’re a first home buyer.

At the minimum, you’ll usually need around 10% of the purchase price saved to pay for fees, a 5% deposit, and stamp duty. For a new property, you may be able to save less if you’re eligible for the First Home Owner Grant. You can use our Stamp Duty Calculator to estimate what you may need to pay in stamp duty and to see if you may be eligible for a First Home Owner Grant.

Keep in mind, you’ll also have to pay LMI unless you are borrowing less than 80% of the purchase price.

How Much Is LMI?

When you’re buying a home, if you don’t have a large enough security, the lender will require Lender’s Mortgage Insurance (LMI) so they can lend more than 80% of the Loan to Value Ratio or LVR. LMI makes it possible for you to get a loan in the first place without a huge deposit. Depending on the size of your deposit and the size of your loan, your LMI fee could be thousands of dollars.

LMI rates vary with loan size and LVR. Generally, the smaller your loan size and the lower your LVR, the less you’ll pay in LMI. The fee also depends on what insurer your lender works with – each LMI provider will charge a different fee. To get an idea of how much the LMI fee can vary, here are some examples:

• With a $390k loan for a property valued at $430k, LMI would cost around $10k and you’d be borrowing just over 90% LVR.
• With a $700k loan for a property valued at $770k, your LVR would be close to 91% and your LMI fee would be around $25k! For the same $770k property, if you had a larger deposit and could get your LVR down below 85%, LMI would cost closer to $8k or $9k.
• With an 80% LVR loan, lenders would waive LMI. We also have lenders on our panel who will waive LMI with an 85% LVR loan or even a 90% LVR loan if you work in certain professional fields such as medicine or law.

The fee can vary from a few hundred dollars to a thousand or more, depending on which lender you apply with. That’s one of the advantages of using a mortgage broker. With so many options, you can compare how much you would pay in LMI depending on which lender you apply with.

You can call us on (07) 3146 5732 or contact us here and we can assess your situation and find out what options you have when applying for a loan. Reach out to our friendly consultants today!

How to Make Sure You’ll Qualify

Once you feel confident you’re ready, the next step is to take a more in-depth look at your ability to qualify for the loan you want. Here are some of the reasons lenders may not be interested in offering you a home loan:

• • Your financial lifestyle isn’t stable enough – for example, if you have changed jobs or addresses in the past six months.
• • When the bank does a valuation on the property, they may decide it would be too difficult to sell in the case of a default, for example, if it’s not located near a major city. Lenders will hesitate with special or unique properties like high rise apartments, flood zoned properties, converted warehouses, and heritage listed properties. Your application could also be denied if the bank decides the value of the property is much lower than the asking price.
• • Any problems on your credit history, even small issues like one late payment, could be a problem. If you have credit issues, it’s important to apply with a bank that is willing to understand your situation – some will deny your application automatically if your application doesn’t do well on their credit scoring system.
• • Being self-employed can make it more challenging to qualify with certain lenders.

Every bank has its own unique lending criteria so even if it’s unlikely you could qualify with one bank, that doesn’t mean there aren’t a number of other lenders you could qualify with.

Fill out our free online enquiry form today and we can take a look at your situation. Because our mortgage brokers are familiar with each lender’s home loan criteria, we can let you know which loans you’ll be able to qualify for and can give you a professional assessment of your situation.

Step-by-Step Home Loan Process

When you’re ready, there are a few steps to the process. You don’t just fill out an application form, send in a few financials, and cross your fingers. Nor do you have to go through a lot of confusing steps without any direction. Step one to getting your first loan is to get the help you need.

Put Together Your Home Loan Team

• You’ll need an independent conveyancer. This is a step you can take as soon as you know you plan on buying a home – you don’t need to wait until you’re about to sign a contract to find someone. Conveyancing can cost anywhere from a few hundred dollars to $1500 or more. When choosing a conveyancer, the goal isn’t necessarily to find the cheapest option, but rather someone who’s transparent about fees, who will quickly communicate with you, and can complete the process in a timely manner. It can help to work with someone who is a member of a professional body such as the Australian Institute of Conveyancers or is a Certified Practising Conveyancer (CPC). You can also ask us for help in finding one.
• Especially if you are investing or if your home loan is a non-traditional loan such as an SMSF loan, you may also want to talk to either your accountant, a financial advisor, or both. They can help with planning out a tax strategy and assessing how your loan can best serve your long-term financial goals.
• To help you with the entire process, from choosing a loan through to settlement, you can use a mortgage broker. You can work with us for free and we’ll make sure you know which lenders you can qualify with. Our expert brokers will also be there to take care of every step, from submitting your paperwork to negotiating your interest rate – we’re even here for you if you need us for any questions or concerns after your loan is settled!

See if You’re Eligible for the First Home Owners Grant

You may be eligible for the First Home Owners Grant (FHOG), as well as other housing assistance programs offered by your state. These grants are usually available to first time home buyers, not property investors. You can apply for grants later, but it’s helpful to know what you may qualify for to help you decide what you can afford.

If you’re not sure what the eligibility requirements are, or what grants you may be able to apply for, get in touch with us. Call (07) 3146 5732 or contact us to speak to one of our specialists.

The Loan Pre-Approval

When you know which lender you want to apply with, we can submit your application, including all your financial documents, to the bank for you. The lender will then let you know whether or not your application will be approved and how much you’ll be allowed to borrow.

You should get pre-approved well before buying a home. Loan pre-approval is an important first step when buying your first home. This is where you find out how much you can borrow so you understand your house shopping budget.

Loan pre-approval can also help you get the home you want – having a pre-approved loan signals to the buyer and their real estate agent that you are serious about purchasing the property.

Keep in mind, most pre-approvals only last for a period of three to six months so you’ll want to be ready to buy a home once you are pre-approved.

Are loan pre-approvals completely accurate?

No, not always. Every lender will have a different pre-approval process and some are not in-depth enough to give you a guaranteed outcome. Some will involve a look at your income, bank statements, and credit history. Others don’t even include a credit assessment – which means you could still be denied even if everything goes well with the loan pre-approval.

Other factors that could lead to your loan being denied after being pre-approved include:

• The valuation – your lender will assess the value of the property before issuing you a loan. If it’s too low, you probably won’t get the loan.
• Interest rate swings – if market rates change significantly, the lender may have to re-assess your financial situation to ensure you can still service the loan.
• Personal financial changes – any changes to your situation such as a job change or a new problem with your credit could make you ineligible for the loan.
• Declined for LMI – even if your lender approves your application, if the lender’s LMI provider rejects your application, you’ll ultimately be denied by the lender.

Finding the Right Property

With your pre-approval, you can shop around for homes with a pretty good idea of what you can afford. Now it’s time to identify your key wants and needs and make sure you’ve researched the market. Then you can make an offer on the home you want.

What do you want out of a home?

When you’re buying your first home, it helps to have a clear idea of what you’re looking for in a home and its location, as well as what your priorities are. Here are some factors to think about to help you really assess a potential new home:

• Is it close to your work – how long will your commute be?
• Do you have children or are you planning on starting a family? If so, how good are the nearby schools?
• How much space do you need for necessities like a growing family or a home office?
• Is it important to you to be able to walk to the grocery store, the park, and other local amenities you frequent?
• Does it matter if you can access public transport?
• What features matter the most to you in a new home – a luxury kitchen, lots of space, hardwood flooring, eco-friendly design?
• You may also want to check with the local council to make sure you’re aware of the regulations and what limits you may face in the future if you want to do any renovations.

You don’t need to get everything on your wish list when searching for your dream home. It is, however, helpful to know what your priorities are as you and your real estate agent can use this information to guide your search.

You’ll also learn more about what you want – and what’s out there – simply by visiting more open houses. Visiting homes can also be a central part of your market research. You can also get a good idea of your local market by looking at what properties are selling for in your area. As you know your budget from your pre-approval, you can then check out properties that are comparable to the ones that sold within your price range.

Once you find a property you could see yourself living in, spend some time in the neighbourhood. It’s helpful to visit at different times, such as in the early morning and in the evening, as well as on both a weekday and the weekend. Get a feel for the atmosphere and make sure it’s a place you want to call home – you’ll probably be living there for quite some time!

The Process of Finding Your Loan and Your Home Includes:
1. Saving for a deposit
2. Talking to a mortgage broker and organising your team
3. Getting pre-approved for a loan
4. Researching the market to determine what homes are in your price range
5. Looking at homes and finding the one you want to make an offer on

What if I’m Buying off the Plan?

If you’re buying a home that hasn’t been built yet, the home buying process can be a little more complicated.

With buying off the plan, there are a couple of things to keep in mind:

• The value the developers tell you could be much different from what the bank’s valuation says because the property hasn’t been built yet.
• Because there’s a long period of time between when you sign the contract to buy the property and when you become the actual owner, the bank may not want to approve your loan this far in advance – there’s a risk your financial situation will change before the settlement date.
• There are some lenders that will approve your loan as early as 18 months before settlement, although many will not provide this until 3 months in advance at the earliest.
• You also want to watch out for things like a builder that doesn’t have a strong reputation, or signing a contact before the development plans have received council approval – you don’t want to buy an off the plan property only to have the project take too long or worse, never reach completion.

Make an Offer on the Home You Want

You know exactly what you want and you have your pre-approval financing in order to buy the home – now you have to make the right offer so you can get a fair price and so you can be the buyer the seller chooses to make a deal with.

Here are some tips for making an offer:

• • Learn what you can about the seller – your real estate agent can help with this. If the property has been on the market for more than six weeks or if there is some reason the seller wants to sell quickly, you may be able to offer a lower price.
• • If the market in your area isn’t that competitive, you can wait for the seller to make an offer first. In a buyer’s market, it’s not unusual for the seller to reduce the price more than you anticipated.
• • When negotiating, try to not let your emotions impact your decision making. Know how high you are willing to go – and what you can comfortably afford. You don’t want to agree to a price that’s going to make it difficult to repay your loan and keep up with all your other homeowner expenses, like homeowner's insurance and regular maintenance.

The Offer Process Includes:
1. Identifying your purchase price limit
2. Making an offer
3. Negotiating the price

The Cooling Off Period

Once your offer is accepted, it’s time make sure your loan and the home are what you expected before you sign the contract of sale and pay a holding deposit. You may have a cooling off period of a couple days that lets you back out of the sale if you aren’t able to get formal approval of your loan or if it turns out there is a problem with the property. In Tasmania and Western Australian, there is no cooling off period. In Queensland, you have 5 business days.

If it’s taking a long time to get your formal loan approval, you can ask for an extension of the cooling off period. As long as there aren’t other buyers who had shown interest in the home, the seller will probably agree.

The cooling off period is when you can complete any necessary inspections. It’s important to work with an experienced building and pest inspector – if they overlook signs of a termite infestation or a leaky roof, you’re stuck with the problem. You can ask your conveyancer to recommend a good inspector in your area. The conveyancer will also check that the certificate of title for the property is ready to be transferred to you before your loan settles.

It’s recommended to go along for the inspection. That way you can ask any questions and see first-hand any issues that come up so you know exactly what you’re dealing with. Your inspector can tell you what needs to be done to handle any problems.

As long as there are no issues and you have formal approval from your lender, you'll be able to move through to the settlement phase. If the inspection does indicate a problem, you can talk to your real estate agent about asking the seller to take care of it. If they refuse, you still have the chance to back out of the sale if you’re not comfortable paying for repairs or another problem yourself. This could be one of the most important financial deals of your life so make sure it is fair to you.
The Cooling Off Period Process Includes:
1. Signing the contract of sale
2. Getting formal approval of your loan
3. Arranging for pest and building inspections, as well as strata inspections if applicable

Loan Settlement

Once you have formal approval, you can sign the contract to purchase your home, but you still will have to sign the loan offer. After you pay your deposit, the settlement date will follow about six weeks later.

First, expect to wait a few days for the loan documents to arrive in the mail from your lender.

Once you receive the loan offer documents, it’s a good idea to look through them with your mortgage broker and an independent solicitor. You want to triple check the documents, ensuring you fully understand the agreement. This is also where you can find any errors and have the bank correct them. It’s actually not out of the ordinary to find a mistake on your loan document. If you sign the offer with a higher interest rate than you had agreed to, it may not be possible to go back and have it changed later on!

Once you’ve reviewed it with your team and you’ve included any required documents, like evidence of property insurance, you should send it back to the bank right away. It will take the bank a few more days to get to your paperwork and for the loan to go through to settlement.

During this time a couple of things will happen:

• Your conveyancer will inform you if there are any financial issues, like more funds you may need. You can give these funds directly to your conveyancer who will take care of them for your loan settlement.
• You should do a final inspection of the property.
• You can apply for any grants and buy insurance for your property.
• There is a meeting between your conveyancer and bank and those for the seller. This is when the loan funds and any other funds are exchanged for the certificate of title. Then the current mortgage is released on the property.
• The conveyancer lets your real estate agent know when they can release your deposit to the seller.

That’s it, the settlement is complete and you are officially the homeowner. This is when you can finally celebrate!

The Loan Settlement Process Includes:
1. Reviewing your loan offer with your broker and solicitor
2. Signing and returning the loan offer
3. Paying your deposit
4. Getting your insurance and applying for any government grants
5. Doing a final inspection of the property
6. Loan settlement day – the meeting your conveyancer and lender will handle
7. Getting the keys to your new home!

Do You Have Questions on Buying Your First Home?

Don’t hesitate to contact the experts at Nexus Money. There’s no doubt about it – the home loan process is complex. But, you don’t have to go through it alone. Call (07) 3146 5732 or contact us online today. We can answer any questions you have and about getting a home loan or any other part of the home buying process.