Home Loan Approval

How Home Loans Work

From the borrower's point of view home loans are pretty straight forward, but behind the scened there is a lot more going on. The home loan lender creates a loan account from which they withdraw the agreed upon amount of money. They then hand this money, along with the deposit paid by the borrower, to person who is selling the house. The home loan lender then begins charging interest on the loan amount and requires the borrower to pay back this interest plus part of the principle of the loan on a regular basis.

All of this ange of money takes place on the settlement date for the property. There are also a number of other payments that are made at settlement, such as government stamp duty, legal fees, valuation fee and lenders mortgage insurance. All of this should be handled by your solicitor or conveyancer and all you have to worry about is moving into your new home.

Once the propery has been settle on and the loan account drawn down then the home loan lender will take a mortgage over the property so that they can use it as security for the loan. What this means is that should you ever get behind on your loan repayments then the lender has the option to sell the property to recover the amount that they loaned you.

When you have repaid the entire amount that you borrowed then the home loan is finished and the loan contract terminated. The home loan lender will then remove the mortgage over the house and the property title finally belongs to you.

Steps For Home Loan Approval

The home loan approval process includes a number of steps that you need to go through before applying, as well as a number of steps that the home loan lender will go through. Just about all of the home loan lenders in Australia follow the same process, so it is important that you familiarise yourself with the steps so that you can get you home loan approved as quickly as possible.

The first few steps you should go through yourself before you even think about applying for a home loan.

1. You should begin by trying to work out yourself (don't rely on the bank to tell you) exactly how much you can afford to borrow. You can do this by firstly drawing up a proper household budget to see how much money you can afford to pay each month in mortgage repayments. Then look at how much deposit you have saved up (hopefully 20% otherwise you will have to pay LMI) and what loan amount you can comfortably service.
2. Next get your credit history report and look through it to see if there is anything bad on it. All lenders will look through this report thoroughly so make sure that you know what's on it and be ready with a good explanation if the lender asks about any of the bad marks.
3. Write down a list of all the loan features that your new home loan MUST have and also all the features that it would be nice to have.
4. Finally you need to decide on the loan product that meets all of your requirements. You can do your initial research online, but then once you have narrowed it down to a few it is a good idea to meet with a representative from the lender to get more detailed answers to your questions. You may want to at this stage employ the services of a professional mortgage broker in order to find the right loan for you.

Once you have decided on a lender the next few steps are all about getting pre-approval for your home loan.

1. You can either apply for the home loan online, in person, over the phone or through a mortgage broker. At this stage you will be required to provide a lot personal information about yourself.
2. Then the home loan lender will require all of the details about your current financial situation. This will include information about your income, payments from the government, allowances, other loan repayments, assets, liabilities, savings and an estimate of your living expenses.
3. The home loan lender will then need you to provide them with copies of financial documents. this is done to make certain that the information that you have provided in you application is correct.

The final steps relate to actually purchasing the property and finailizing the loan on the date of settlement.

1. At this point you will have pre-approved up to a certain limit and the challenge is to find a house that is right for you under that limit. You should use the fact that you have pre-approval when bargaining for a house because you DON'T have to enter the clause 'subject to finance' when making an offer.
2. Once you have purchased a house and the 3 day cooling off period has passed (not applicable for houses bought at auction) then you need to inform your lender about the purchase and the date of settlement. You will also need to inform you solicitor or conveyancer and provide them with a copy of the contract of sale.
3. It is only at this point that the home lender is able to provide you with confirmed approval because they now know what security the property will provide (something that they didn't know what they gave you pre-approval). For this reason it is possible for the lender to now reject your application based on the type of property purchased. If this is the case then you must quickly look for an alternative lender who will approve your home loan.
4. Provided that everything goes well your home loan will be approved. Then on the date of settlement your legal representative will get together with the bank's legal team to disperse the loan and deposit money to all of the appropriate parties. At this stage you need to sign the loan contract and then you can enjoy your new home.

Home Loan Rejection Reasons

There are a number of reasons why your home loan may not be approved. Each lender has their own approval process and selection criteria so it is important to not be discouraged if you get rejected for a home loan from one particular lender.

Having said that it is a waste of time and effort if you have to keep applying for a loan from lots of different lenders. Therefore you should try to understand how the approval process works and what the most common reasons for rejection are before you apply. This way you can try to emphasize your positive points in the application so that you can create the best chance of your home loan being approved.

• Your Credit History Report has bad marks on it.
• You do not have a credit history. Believe it or not it can act against you if you have never borrowed any sort of money before. In this situation you can either get a guarantor to secure the loan or get a credit card for a few months and then apply for the loan again.
• You either have not worked in the same job for long enough or your employment is not classed as full-time.
• You have serviceability problems, which means that your income is not high enough to cover the loan repayments and all of your living expenses.
• The deposit that you have is not large enough for the property that you want to purchase.
• You have not been able to properly demonstrate that you saved the money for the deposit. With some lenders this is very important because it proves that you have good money management skills.
• The amount that you paid for the house is over what the lender's valuer says the actual property is worth.
• There are some types of property that the lender will consider too risky to loan money against, such as small apartments that are less than 55m².
• Your current debt level is already too high and you owe too much money already.
• Some lenders will reject your loan application of you have previously filed for bankruptcy.
• If you failed to disclose some financial information to the lender or you were not honest in your application then you will more than likely have you home loan rejected.

How Long Does Home Loan Approval Take

Home Loan Approval in Australia varies from a few days through to a few weeks depending on the complexity of the application and the background of the borrower. If you provide accurate and comprehensive information about your current financial situation and have not had any credit troubles before then the approval process will be much quicker. Once the lender has approved your home loan then they will wait until the settlement date of the property before they place the money into your loan account and disperse the money to all of the relevant parties.

Differences Between Home Loan Lenders

After looking around for a while you will soon discover that not all the home loan lenders in Australia are the same. In fact the biggest difference can be found between the major bank lenders and the non-bank lenders. There are lots of areas and features where lender differ, so it is important that you do your research thoroughly in order to ensure that you choose the best home loan deal for your particular circumstances.

1. There are lots of differences between the traditional bank lenders and the range of non-bank lenders in Australia. The big 4 banks control over 80% of the home loan market and offer a sense of security because they are so large. Whilst the smaller non bank lenders and credit unions often have cheaper interest rates and are more flexible because they need to attract your business.
2. People who don't fit the stardard home loan criteria that most banks are looking for (ie: self employed, bad credit history, etc) will find many more options with the smaller finance companies and non-bank lenders who specialize in this area.
3. Every lender has a different method for deciding who can receive professional packages or discounts off standard variable interest rate. Some lenders require a minimum size on the loan amount, whilst others require you to have an income above a certain amount.
4. The application fee will vary significantly from lender to lender. Also you will find that only certain lenders are prepared to waive this fee in order to attract your business. If they do waive the application fee be sure to ask if they have introduced a deferred establishment fee instead, and how long this fee is in place for.
5. The minimum deposit amount will vary between home loan lenders, so check this out before you waste your time seeking approval. Also some lenders will place importance of how you got the deposit. If it was the result of a one off gift (ie: inheritence) then they might not get home loan approval from them.
6. No-one ever believes that they are going to have trouble meeting the loan repayments, but it is a good idea to check out the financial hardship policy of each lender before choosing one, because this can be an area of real difference.
7. The fixed interest rates that are provided by the different lenders can vary significantly, so shop around if you are looking for a fixed interest home loan. Also the type of loan (ie:basic or standard variable) that any fixed loan defaults back to after the fixed period ends will be different for each lender.
8. Also for fixed rate home loans not all lenders will allow you to make extra repayments into the loan account, so do your research if this is a feature that you need.
9. Every home loan lender will provide a range of extra banking services such as a credit card with no annual fee, internet banking access and even discounted insurance. Whilst these services are useful they should not have a major impact when it comes to deciding which home loan to choose.

If there is some loan terminology or abbreviations that you are unsure about the meaning off then you can check out the home loan definitions page, which has a detailed explaination about some of the more confusing aspects of getting a home loan.

More Home Loan Information :

1. Australian Home Loan Types
2. How To Get A Home Loan
3. Home Loan Application
4. Home Loan Approval
5. Help With Home Loan Repayments
6. Home Loan Definitions