Buying a house – What to consider when applying for a home loan
Applying for a home loan
Buying a house is often one of the most exciting purchases you’ll make. For first home buyers this is especially true, but there are a lot of steps in the process of purchasing a house and conveyancing. Securing your home loan is a key step in your purchase. For information on the benefits of using your Kiwisaver for purchasing your first home, see our previous article.
Most people need to apply for a home loan to help pay for their house purchase. There are a number of different lenders in the marketplace ranging from registered banks through to finance companies and even some overseas banks.
Shopping around for a home loan
If you are just looking to do some quick research on interest rates or to get an idea of the size of mortgage you can afford, there are some excellent online calculators available. Be aware that these are only as accurate as the information you feed in, and lenders may take other factors into account when considering your loan application.
Each lender has a range of mortgage products available, all of which have different criteria, terms and conditions. Finding your way through this maze is not always easy. You should shop around and talk with lenders to get the most appropriate product for your particular circumstances.
Some people may prefer to use a mortgage broker to help them. Make sure that you get a broker who deals in the type of product that you want. For example, you may want a short term loan or a loan from a finance company so you need to ensure your broker deals in that type of product. When dealing with a mortgage broker or any financial advisor, we recommend you check they are compliant with the Financial Advisers Act 2008 and provide you with the required disclosure statements.
When considering using a broker find out how you pay for their services. Most brokers are paid a commission by a lender, or others may charge you an extra fee. Check before you sign anything and talk with us if you would like advice.
A lender’s security
When considering a loan application a lender will want to ensure:
- You have enough income to meet the loan repayments and other outgoings. This is sometimes known as ‘debt servicing’. A lender will usually ask for a monthly budget to ensure you can afford the mortgage repayments, and
- There is enough security in the property. Lenders sometimes refer to this as the ‘Loan to Value Ratio (“LVR”). It is the difference between the value of the property (which may be different from the price) and your personal contributions.
Two stage process
There is generally a two stage process to obtain housing finance. The first stage is about establishing price ranges and pre-approval which can help you understand how much you can afford to offer.
Stage One: Looking for a new home
You should approach a lender or mortgage broker before looking to buy a home to establish how much you can borrow. This will establish the price range of the property you can afford.
A lender will need to have evidence of your gross income/s (generally a lender will accept pay slips as proof of income), a monthly household budget and a statement of position which lists your assets, any liabilities and so on.
To help you in your preliminary calculations to work out how much you can borrow and afford to repay, most lenders have mortgage calculators on their websites.
To make your offer as ‘clean’ as possible, ie: as few conditions as achievable, you may want to obtain some formal unconditional pre-approval from a lender to make your offer up to a particular sum. Talk with your lender about this.
Stage Two: Once the Agreement is signed
When the Agreement is signed your lender will need a copy of the Agreement; some lenders may need a copy of the title for the property, or a builders report.
If the amount sought exceeds your lender’s LVR, they may need a registered valuation of the property before confirming a loan.
Other considerations when applying for your home loan
It is important to note that even if a lender has indicated a loan will be approved before the Agreement is signed, the Agreement should still be made conditional on ‘obtaining finance satisfactory to the purchaser’, unless you have a formal unconditional written loan offer from a lender.
It would be unwise to simply rely on a verbal indication from your lender that a given sum will be lent.
Lenders have slightly different lending criteria. If one lender turns your application down, another may be able to help.
Even if your borrowing exceeds the security ratio, some lenders may still lend where mortgage guarantee insurance cover is arranged. This insurance is taken out at your cost to protect the lender.
It may also be possible to ‘massage’ your financial debts by increasing your borrowing to repay short term credit card and hire purchase debt to bring you within the lender’s criteria. This may be investigated if the lender initially declines a loan.
If you are intending to withdraw your Kiwisaver or obtaining a Kiwisaver HomeStart grant from Housing New Zealand, you should talk to us as soon as possible to ensure that your application meets the necessary timeframes.