Don’t believe everything you hear about home loans. Seek the truth from a professional. This Beginners Guide to Home Loans Myths can help understand the home loan process and clear up some of the misinformation you might hear.
I have been involved in arranging home finance for people for many years. I have worked for a major bank and finance company and as I write this guide to home loans, I have been an independent Mortgage Broker in Sydney for 13 years. With 25 years of experience and access to information from other highly experienced brokers and bankers I still get challenged by clients who sometimes do not like what I tell them, if only they had read this guide to home loans and not believed what their other “experts”had told them !
There is a lot of “water cooler” talk out there in the market place and people, while trying to be helpful, will offer advice on borrowing money or structuring loans. Beware, quite often this advice is based on hearsay and not lender policy or principles, that’s where this guide to home loans comes in. You may have heard people say “just get a guarantor”, or, “you need a credit card to get a credit rating before you get a loan”. Or perhaps the old favourite “I can buy a house and consolidate all my other debt into the mortgage”. While some of this information may have some relevance in some circumstances, in a lot of cases it is just plain wrong. I hope this guide to home loans will dispel some of these myths to help people looking for a home loan get onto the right track.
Guide to home loans – Myth No 1. You Have to Shop Around for the Best Deal
While I agree you need to look at many loan options BEWARE how you do it. This part of my guide to home loans will help you choose how to research a home loan that is right for you.
Nowadays with so much information on the internet many people use it to source loan information. But what I have seen happen is people can get into a trap of applying for a loan on line with out knowing they are doing it, if only they had read this guide to home loans! Mistakenly applying for a home loan can also happen sometimes if you meet with a lending manager in a Branch. With these methods sometimes before you know it your details are entered into the lenders computer system, a credit check done and you are told your loan is approved subject to you providing the supporting income and savings evidence. While you might be please to know the lender will give you a loan you were really only shopping around and had not made a decision on the lender of your choice but now you have this application recorded against your credit rating.
Most lenders now use an online credit scoring system to assess loan applications. The human personal element has been removed. Here is a secret the banking industry doesn’t tell you. There are about numerous fields in an application that get a “Score”. No one knows the exact number of fields, the lender can’t or won’t tell us. If the score comes in outside the approval score your application is automatically declined. Have you seen Little Britain, “The computer says No”. If the computer says no it is very hard to get it overturned. It might be possible to have it overturned but it will delay your application at a time when time is of the essence. One of the main reasons loans are being declined with this credit scoring system is too many credit enquires over a short period of time on a client’s credit check report. From a lenders point of view they do not know that you have only been shopping around and did not actually proceeded with the loan applications that appear on your report. Their thinking is if the previous lenders would not approve a loan for you why should they take the risk and your loan is declined.
Guide to home loans – Myth No 2. You can have a guarantor
So many times I have new clients coming to me and saying “my father will go guarantor” so I can get the loan. It just does not work that way, this part of my guide to home loans explains some of the ins and outs of having someone being your guarantor on a loan.
A guarantor can not be used to help you borrow more money than you can afford on your income alone. If their income is needed to help repay the loan the lender will require them to be a co borrower and their name will be on the loan. This in turn will restrict them from borrowing money in their own name as they now have a loan listed on their credit report. The only way a guarantor can be used is by offering an additional property or cash as security against a loan in order to save the cost of mortgage insurance.
When you are buying a property and you need a loan unless, in most instances, you have savings to cover not 20% of the purchase price plus stamp duty and legal costs you have to pay a once only mortgage insurance premium. This premium protects the lender in case you default on the loan. The premium can be thousands of dollars. Most lenders allow a guarantor in this instance. The guarantor has to offer a property as security for the loan and the amount of the guarantee is limited to the mount required to have property offered as security covering up to 20% of property purchase and associated costs.
This form of guarantee is often referred to as a family guarantee or family pledge.
It is important to note that the guarantor in this instance is not being assessed in order to make repayments on behalf of the borrowers. Their guarantee is only being used to save the borrowers the cost of the mortgage insurance. There usually has to be a family connection in order for this guarantee to be approved and the guarantor has to obtain independent financial and legal advice.
Should the borrower default on the loan both the borrowers and guarantor’s property could be sold to cover the amount owing to the bank. In most cases should this happen it would be in the guarantors favour to try and arrange finance to cover this limited guarantee and have his property handed back to him. The problem arises then the guarantor does not have the borrowing capabilities to finance the amount of debt he has guaranteed.
Guide to home loans – Myth No 3. I need to borrow money and get a credit rating before I can get a home loan.
I often hear clients say I have to borrow money on a credit card or personal loan to get a credit rating so I can get a home loan. Borrowing money on a high interest loan just to get a credit rating is just throwing good money away. There are other ways to build a great credit rating – these will now be explained in this guide to home loans.
What you really need to do to get a home loan is show a good savings history that will demonstrate to the lender that you have the income and lifestyle to commit to and repay a home loan.
When a lender is accessing you for a home loan they look for a savings history, stability of employment and your ability to repay the loan based on your income and other loan commitments. By having a credit card or personal loan the amount you can borrow is reduced.
If you have borrowed money in the past and missed payments or defaulted on the loan this will make it very difficult to be able to get a home loan.
Guide to home loans – Myth No 4. I can combine all my debts into my home loan.
Time and time again I have clients coming to me and they want to buy a property or refinance their current loan and also combine all their current debts into the new loan. This part of my guide to home loans will explain your options for debt consolidation.
This can only be done if you have enough equity in the property you are giving the lender as security for the loan. By equity I mean the difference in the loan amount to the value of the property. An example of this is you have a loan of $400,000 against a property worth $500,000 which means you have $100,000 equity or 80% equity.
When you are combining additional debts into your home loan this is seen as refinancing and the lender will only lend up to 90% of the value of the property held as security. Most first home buyers borrow between 90% to 95% of the value of the property so combining additional debts is not an option available to them.
No guide to home loans is complete without some tips for making the process of obtaining a home loan run smoothly.
Guide to home loans – Truth Number 1. Seek the Advice of an expert.
When you are looking for a home loan or even once you have one you will constantly have people giving advice on what can and can’t be done. Some advice will be correct, some will have once been right but now due to changes in lending policies will be obsolete and some advice will be just plain wrong. That’s where my guide to home loans, and more importantly personalised advice I can give you, comes in handy.
In order to ensure that you have the most up to date information you need to be speaking with the people who are involved on a daily basis with a variety of lenders and know their policies and procedures.
I have been advising people on home loans for over 25 years and have not only the knowledge and experience that comes with working in the home loan field but I also have the latest information at my fingertips due to the technology I have available to me.
My best advice to you is before you believe any of the “water cooler” talk about home loans you contact me to confirm what you have heard is true of false.
Guide to home loans – Truth Number 2. Know what is on your credit report.
Everyone should be aware of what is on their credit report. My guide to home loans will help you sort this out.
You can get a copy of your report at www.vedaadvantage.com.au. You will wait 10 days for a free report or for about $60 dollars it can be emailed back to you in an hour. I provide these free for my clients if we think there may be a problem. So how can you shop around safely, investigate your options and not have your enquiries recorded on your credit report? The best way is by meeting with a reputable mortgage broker who is a member of the Mortgage & Finance Association of Australia. A member of this organization has a standard of ethic and education they must meet and you can feel confident you are dealing with a professional.
Guide to home loans – Truth Number 3. Get the best advice and information.
A mortgage broker will be able to show you various interest rates and loan products from a number of lenders. They can also discuss your personal situation and advise you on what loan product best suits your needs. Each lender has different criteria when they assess your loan application and some lenders will offer you a bigger loan than another lender. A mortgage broker can sort through all the options and you get to pick the loan that you want. They know the policies and procedures of the lenders and can save you a lot of time and effort by talking through any loan characteristics that may or may not suite your situation.
A Mortgage Broker really is a one stop shop for your home loan needs.
I hope you have found this information useful and if you have any questions please contact me Kim Wight Mortgage Broker Sydney at firstname.lastname@example.org.