First Home Buyer Loan Guide
First Home Buyer Loan – What You Need To Know Before You Start
If you are a first time home buyer and looking to apply for a first home buyer loan there are a number things that would be helpful to know before you apply for a loan.
The following information will also help you when you’re out in the property market looking for a home. You will be able to present yourself to real estate agents and vendors as a well informed property buyer and not some uninformed ‘Noobie’
How Much do You Already Know?
Buying your first home can be without a shadow of a doubt one of the most exciting and biggest purchases you will ever make. It can be one of the most important financial decisions anyone can make in their entire lifetime. Therefore, it’s critical to carry out effective research beforehand in order to get your first home loan set up right.
Before we get started, you will make your life a lot easier if you use a professional mortgage broker who’s services come free. They don’t charge you anything, because the bank you end up choosing will pay their commission. They save a lot of time and money by quickly helping you sort through the usually laborious process of assessing all of your available loan options.
Their secret is, they have access to advanced software that has all the lenders and available loans listed and updated in real time. They are able to rapidly narrow the best loans for your needs down to a meaningful short-list.
Why Would You Want to do it the Hard Way?
Instead of scratching your head trying to pick a loan from hundreds they will enable you to review the short list they have assembled for you and you can choose the loan most suited to your personal situation.
Mortgage brokers are usually a lot more focused than bank employees, because brokers can look at a vast array of different finance options from the big banks, all the second tier banks, most credit unions, building societies and a whole range of other non-bank lenders in order to find the best loan for any given situation.
Should you go directly to a bank, they will only try to sell you the products they have. When you are in that situation you really don’t know if you’re getting the right deal or not. Simply because the bank employee isn’t going to tell you what the bank across the road has to offer, are they? That is, unless they want to risk getting the sack!
Expert Advice for Free!
It gets even better, if you can source a home loan broker that specialises in first home owner loans. They will even give you better assistance and information because they help first home buyers all of the time.
What about the first home owners grant or other concessions that may be available in your state? Do you need help with understanding what that’s all about and how to go about obtaining these concessions? Not to worry you’re not on your lonesome.
Many first home buyers find the whole mortgage process confusing and hard to fathom, Where to start first, when looking to purchase their first home. There are sooo… many mortgage lenders and soooo… many options it can make it difficult to figure out which way to turn.
If you decide to use a savvy mortgage broker they will organise everything for you including the first home owners grant and concession applications.
Supporting All the Way
After the loan has been approved they will also help you all the way through to settlement. They will be communicating with real estate agents, solicitors and the bank on your behalf to ensure that everything gets completed on time.
In other words, a good mortgage broker will take all the stress out of the process for you. They will handle all the little details that sometimes get lost in the shuffle and that can cause a lot of worry when things start to get delayed. You’re not going to get that kind of service from a bank.
There is a mountain of information out there these days that can bury first home buyers looking for information on getting their first home and the loan to finance it.
Getting Your Best Interests Taken Care of
The fact is first home buyers just want straight forward information on what is going to be best for them and their situation. They want to be educated on the correct steps they should be taking by getting clear correct information.
High on their list of needs is finding someone they can trust to organise a home loan that is going to help them get the home of their dreams.
First home buyers buying their first home can at times be viewed by some unscrupulous operators as being vulnerable. They see them as being prone to being ripped off. However, these shady operators are only looking out for their own best interests, not yours.
If you have any questions about the credibility of any mortgage broker or mortgage agent you can check with either the Mortgage Finance Association of Australia (MFAA), or the Australian Investment and Securities Commission (ASIC).
What a Bonus Google is
Whenever you’re doing your own initial research into borrowing to buy a home, Google can be a handy source to use if you come across any mortgage or property terms you don’t fully understand in this article.
This article is really only going to scratch the surface of what needs to be observed by a first time home buyer when applying for their first home loan. However, a few of the pertinent areas we can cover will include types of borrowers, matching finance sources and first home owners concessions.
Here is a link to a first home buyers checklist that can help you start understanding the process.
Below You Will Find Important First Home Buyer Information
- Don’t make this number one mistake
- Investment property home buyers
- How much deposit do I need
- First home buyer concessions
- How much can I borrow
- No deposit – family guarantee loans
- First home super saver scheme (FHSS)
Avoid This No. 1 First Home Buyer Mistake
What a Buzz Owning Your Own Home is
Buying your first property can be an exceptionally exciting life experience and at times we can allow our emotions to run away from us. An important step you should take before venturing out into the property market and talking to real estate agents etc. is to get your home loan pre approved.
This allows you to know exactly how much you can borrow and not embarrass yourself in front of a real estate agents and vendors. Once you know that, you can approach the property market with confidence and not commit yourself to something that later on you have to back out of. You can also lose serious money in some of these undo-able situations.
Nothing Like Looking the Part
You will also get greater service from real estate agents and vendors when you create the impression that you know what you’re doing (not a clueless ‘noobie’) and you are a serious buyer that is ready to go. It will also help your bargaining position by letting the vendor know that they can get the deal closed right now!
It will also cause you less stress by being able to obtain unconditional loan approval a lot faster. Once you have a loan pre approval the only thing normally left to do is, having the property valued to the banks satisfaction. This can usually be done in a maximum of 2-4 business days.
No Fuss No Stress
By being able to do the unconditional loan approval quickly you avoid the stress and danger of not meeting the state required 5 day cooling off period.
Once the 5 day cooling of period has expired real estate agents and vendors expect and will pressure you to exchange contracts.
At the exchange of contracts you are expected to pay a 5-10% deposit. You would lose that deposit if you didn’t proceed with the purchase for any reason, such as the bank not approving the loan.
Investment Property First Home Buyers
Get Your Cake and Eat it Too
This strategy can attract first home buyers who want to maximise their borrowing capacity so that they can get into the property market in a meaningful way.
Yes, first home buyers can purchase a property for investment purposes and still be eligible for first home buyer concessions. The catch is they must personally move into the home themselves sometime within the first year of the settlement date and stay there for at least 6 months. After that they can move back out and rent the property again.
Some Conditions will Apply
The above strategy has to adhere to the new Responsible Lending rules and therefore the new rent may not be available to be used in the borrowing capacity calculation.
The strategy can only be used if you can demonstrate to the lender that your ongoing employment or any other allowable existing income is sufficient to service the loan. In other words you cannot use the new rental income you would derive from the purchase to boost your borrowing capacity.
The bonus is though, you will still be eligible for the first home owners grant (on new property) and purchase stamp duty concession (conditions apply).
Larger Deposit Required Though!
With this scenario purchasers are going to find that they will need a larger deposit than they would if purchasing the property for owner occupied purposes. Because, owner occupiers can purchase a property with a minimum of 5% genuine savings, or no deposit at all if they use a ‘Family Guarantee’ loan.
Buyers using the property for investment purposes will find that most lenders will want to see at least a 10% deposit. Although, there are some who will fund loans at a 95% Loan to Value Ratio (LVR).
Keep in mind any loan that exceeds 80% of a property’s value will also have to include Lenders Mortgage Insurance (LMI) and any LMI premium will also have to fit into the LVR cap unless paid independently.
How Much Deposit Do I Need?
Understanding Lenders Mortgage Insurance
Most lenders require first home buyers to have 5% genuine savings as a deposit. Genuine savings means that you have to show the bank your bank account statements that records you have had the 5% deposit in a bank account in your name for at least 3 full months, or you have genuinely saved that amount over the last 3 months.
That said, with some lenders you would need to have more than a 5% deposit. Because, with any home loan that exceeds 80% of the property’s value you will be charged Lenders Mortgage Insurance (LMI). LMI is an insurance policy that you pay for that protects the bank in the event you default on the loan. You can see a lot more information about this with this Google link.
Minimising Out of Pocket Fees
Now, the LMI premium can be capitalised onto the loan. However with many lenders the loan amount including the LMI premium still cannot exceed 95% of the property’s value. This will mean that on average the loan amount available to you will end up being 92% of the property’s value after allowing for the LMI premium. Meaning you would need about an 8% deposit to complete the purchase.
The higher your Loan to Value Ratio (LVR) is, the higher the percentage charge will be for the LMI premium. The closer you get down to the 80% LVR threshold the less the LMI premium percentage ratio charged will be. LMI is not charged on anything under 80% for an owner occupied or an investment property full documentation loan.
All About First Home Buyer Concessions
While we’re talking about how much money you are going to need to purchase a property, keep in mind that we’re assuming that you are going to be eligible for first home buyer concessions. In other words you are going to be excused from having to pay purchase stamp duty costs.
These concessions are only available up to certain price points on a state by state, or territory basis. You can check your state with one of the links on this page to determine what you are eligible for.
If you have a 20% deposit you can avoid LMI altogether and it does allow you to have a wider choice of lenders for choosing your loan from. It also allows your broker to negotiate a better inteerst rate for you.
There are many incentives available to first home buyers in Australia, including the first home buyer’s grant, which is $10,000 in NSW. In addition there is also the option of having no purchase stamp duty on your purchase.
As with all things there are conditions attached.
Here are the state by state and territory website links that will provide detailed information for each location.
How Much Can I Borrow?
Figuring Out How to Maximise Your Borrowing Capacity
Figuring out what your borrowing capacity is going to be to buy your dream home can be somewhat of a dilemma for some.
Quite a few lenders will allow you to borrow up to 95% of a property’s bank valuation. Although there are still a couple left that will go as far as 98% including any fees that will be incurred (such as LMI).
That said, your borrowing capacity can vary widely based on any existing liabilities you may have such as how much deposit you have, credit card limits, personal loans, HEC’s debt payments, how your income is assessed and these days even how much your personal monthly expenses are. In addition to that, not all lenders are the same when it comes to how much they will lend.
What Affects Your Borrowing Capacity
If you need to increase your borrowing capacity it is going to be to your advantage to minimise any financial liabilities you may have before applying for a home loan. Even though it may not be convenient to pay of Hec’s debt, personal or car loans, you may be able to reduce credit card limits or cancel them altogether.
How much income you have is an important factor banks use to calculate your ability to repay a loan. From there they also look at what liabilities you have against that income. They look at your ongoing living expenses and any financial commitments you have when assessing your eligibility.
Use with a Grain of Salt
You can use online borrowing capacity calculators to give yourself a rough idea of what your borrowing capacity is going to be. Don’t get too concerned if they don’t show as much as you were planning on.
Keep in mind that those types of online calculators are usually only going to give you a generalised result anyway. I have seen them to be ultra conservative at times and at other times a way over the top of what a customer could realistically borrow.
If you’re looking to get an accurate assessment of how much you can really borrow, get in touch with an experienced broker who has access to all of the borrowing capacity calculators for each individual lender. They can rapidly tell you not only who would be your best lender for interest rates, but also where you can get the maximum loan amount.
How No Deposit – Family Guarantee Loans Work
No deposit required: Family guarantee home loans have excellent benefits for those struggling to save enough deposit to get their own home.
Family to the Rescue
The way it works is it allows an immediate family member (no Aunts or Uncles) to also pledge up to 30% of the property they own along with the property being purchased as security to the lender. This allows the first home buyer to borrow up to 110% of the value of the property being purchased.
This enables them to avoid LMI and also helps them fund purchase costs such as purchase stamp duty. These loans can also come with great discounted interest rates as the bank now has a lower risk threshold because of the additional equity to protect them against any potential losses.
There are a number of conditions that most lenders apply to these loans and it is important that first home buyers and any family member pledging their property fully understand how they work and the risks involved. You can research these loans online, talk to your broker or lender in advance.
Buying Your First Home With Super Fund Savings
Last year the Government passed legislation to allow first home buyers to accumulate savings in their superannuation fund for a home loan deposit.
For many first home buyers the property market can be a tough nut to crack. This scheme is designed to make it somewhat easier to put together
home loan deposit.
Theoretically it is supposed to allow first time buyers to save for a home deposit faster, because they will receive tax concessions on the money they voluntarily contribute to the scheme.
Before starting you do need to check that your particular super fund will release funds under the scheme once they have been put in there. Also, check for any fees or insurances that could be applied.
Allowable Salary Sacrificing Rules
The scheme allows you to salary sacrifice voluntary super contributions up to a maximum of $15,000 in any one financial year. Up to a total cap of $30,000 over all years. These contributions are only taxed going in at the concessionary rate of 15%.
As of July the 1st this year (2018) you can now release any eligible funds under the scheme, plus any interest dividends earned can also go towards buying your first home
The Tax Advantages
So in essence if you contributed the maximum of $30,000 you would be left with $25,500 that could be withdrawn after deducting the 15% tax they take from the funds when they go into the fund.
However, the good news is, you would have in all likelihood earned some interest in the time the funds were in there and those funds are also eligible to be taken out on top of your original contributions.
But you know the Government, they’re going to catch you coming as well as going. There is a marginal tax to be paid on withdrawals, less an offset of 30 per-cent.
Nonetheless, if their are two of you going at it you could end up with approximately $60,000 altogether to put towards your first home purchase.
Try this link for more information
Also, here is a link to a Government estimator showing how the savings can work.
What Does Non-Conforming Home Buyer Mean?
Bad Credit Doesn’t Mean No Home to Live In
It can mean a couple of things. It can mean people who find themselves in an unusual situation when it comes to how they get paid or how they want to structure or finance their mortgage or home loan. A non conforming borrower can also be an individual who has previously applied for a loan and had their application declined for various reasons, which can include unfavourable notations on their credit report such as defaults, late payments or even a bankruptcy.
Regular lenders are usually quite averse to accepting loan applications from potential borrowers who don’t have permanent or permanent part time employment. Individuals who are self employed, contract or casual workers can sometimes have a difficult time getting a standard home loan approved unless they have a stable track record with documentation to back it up.
When people who find themselves in this category their best bet is to team up with a skillful finance broker. Through their experience they can quickly narrow down your best options. This avoids you from having to go from lender to lender and in the process trashing your own credit score with too many inquiries on your credit report, which will only exacerbate your situation.