There’s a saying a lot of finance brokers use when it comes to buying a new house, “fall in love with the numbers first before you fall in love with the property.”
Buying a new home can be a very emotional experience and quite often people fall into the trap of over-stretching themselves in order to purchase their dream home.
So the first step when buying a property is to have an honest conversation about how much you’re willing to spend both upfront and ongoing and deciding what type of property will fit within these parameters. Your mortgage broker can provide valuable assistance in determining a repayment value that you will be able to manage on your current net income.
Once you have had an initial meeting with your mortgage broker you will need to provide copies of payslips, group certificates, credit card statements, recent tax returns etc to confirm that everything you discussed in your first meeting matches up on paper.
You then need to decide which lender you prefer based on, for example, which interest structure they offer, the deposit required, their lending ratios, whether you want a lender with a branch network or maybe you only have a 5% deposit saved and need a 95% loan.
It usually takes about 3-4 days for a lender to assess your application and if everything checks out, they’ll give you what’s called a conditional approval.
This is really important, as a conditional approval only means that the lender has looked at your application and from the information provided, you appear to have enough income to service the debt and cover the costs once you find a property.
However, they’re not guaranteeing anything with a conditional approval and when you receive it you’ll see a whole bunch of disclaimers. That’s because until the lender has had a good look at the property you want to buy, they’re not going to promise anything.
However, the good news is that you are almost ready to start looking very seriously. But before you do……
This is definitely the most common thing that people forget., I’ve lost track of the amount of times that excited first home buyers have come to me jumping up and down saying, “We’ve just bought our first home!” only to realise that they’ve exchanged without letting the solicitor complete some vital steps.
The cost of using a solicitor to purchase a property can be around $2,500. However, this is money well spent. Your solicitor will carefully review the sale contract along with ensuring you have pest and building inspections and complete strata checks where necessary.
For example, a few years ago a solicitor saved a client of mine $10,000 off their purchase price. The place they were looking at was a one bed apartment in North Sydney and everything appeared absolutely perfect with the property.
However, when their solicitor went through the strata report, she noticed that the sinking fund was negative $150,000.
Turns out that the developer went broke trying to build the property however still owned a number of the units, refusing to give them up. As a result he never paid any strata fees, hence the negative sinking fund balance and a court battle in relation to the matter.
Now, if you’re in a unit block with a negative sink fund, what usually happens is that the strata manager will make all the other unit owners pay extra until the fund reaches a satisfactory level.
In this example, their solicitor estimated how much extra my client would have to pay and the conclusion was they’d probably have to put in an extra $6,000 in strata fees over a 3 year period.
This research was used as a bargaining chip to negotiate $10,000 off the purchase price. Moral of the story, always use a solicitor!
Once you have determined your maximum purchase price, have your pre-approved finance and engaged a solicitor, you are ready to start making an offer on your property of choice.
You also need to be aware of the level of deposit required because it can change things dramatically.
For example, if you’re loan is above 80% Loan to Value Ratio (LVR) then it needs to be approved by both the lender and also a mortgage insurer because it will be subject to Lenders Mortgage Insurance (LMI)
What can happen is that the bank is happy to lend you money but the insurer rejects it for reasons outside your control e.g. the bank has approved too many loans in the street so therefore the insurer believes they are over exposed in that area and as such will not approve the loan.
Most often once you’ve agreed on a purchase price and are ready to exchange contracts you will need to pay a 10% non-refundable deposit. However, if your loan is greater than 80% LVR an alternative is to pay a holding deposit.
A holding deposit is 0.25% of the value of the property, which is also non-refundable, however for a smaller cost it allows you to ‘take the property’ off the market for a given period (usually 5 to 10 days). During this time the agent is not allowed to negotiate with any other bidders giving your broker enough time to get a formal approval from the bank and you don’t risk losing a 10% deposit!
Next the lender will want to determine the property you are buying is not too risky relative to the loan value. The lender will engage the services of an independent valuer to assess the property and confirm that you are paying a fair price for the property.
What if the valuation comes in lower than the Contract of Sale price? The banks will base their LVR off the lower figure of either the valuation or contract of sale.
As such, if it comes in low then you’re going to have to borrow a little bit more which mean a higher LVR and therefore a higher LMI fee. If you’ve only got a 5% deposit and have no room to move you won’t be able to settle on the property.
This is the reason why it’s so important to have a cooling off period if you’ve got anything less than a 20% deposit because you don’t want to risk losing any more than the 0.25% holding deposit.
The valuation’s come back, you may make some adjustments to the loan amount, now it’s time for the bank to commit to giving you the money.
If you’re loan is subject to LMI , the bank will send it off to the insurer to make sure they’re happy. The insurer will then take one final look at all your supporting docs to make sure that they’re all up-to-date and if everything checks out they’ll send your mortgage broker a formal approval.
A formal approval is the bank giving you 100% commitment to funding your property which means you can now confidently pay the 5 or 10% deposit to the real estate agent handling the sale.
After formal approval it takes about 5 days for your loan offer to be sent out to you. This is the legal document which officially commits you to the lender.
Your mortgage broker will detail repayment amounts, any fees and charges, interest rates, what accounts your loan repayments are going to come out of etc.
If you’re a first home buyer this is the time when the bank will submit the First Home Owners Grant paperwork to assist with settlement from the Office of State Revenue.
Once everything is confirmed the bank will send a fax or email to your solicitor saying that the loan docs are “certified and ready for settlement.”
What the bank will do now is fax across to your solicitor the ‘disbursements for settlement’, that’s just bank language for how much you’ll need to put in to settle on the property.
As for the actual settlement, you’re not involved in that part of the process at all. What actually happens is that your solicitor will meet with the bank’s solicitor and the vendor’s solicitor to physically exchange contracts and the settlement cheques.
Once complete, the vendor’s solicitor will inform the agent that everything is settled and you can then collect the keys which means you can move in!
So there you go, the 10 steps to the loan process to help prepare you for your first property purchase. Of course, if you have any questions please either call me on 0400 530 868 or email tim@multipartfinance.com.au.