A 5-Step Guide to Getting a Home Loan

February 14, 2022
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Getting a home loan can seem like a daunting process. If you’re new to game and getting your first home loan, don’t be overwhelmed with the formalities of the procedure. Even long-time investors know that getting a home loan can be a long and sometimes arduous process.

There are a lot of options out there, with a bunch of new financial terms you might’ve never heard of as well as all that paperwork. But fret not, we’re going to break the sequence down into 5 easy steps so you know exactly what to expect.

Want a smooth transition into homeownership? It all begins with a sound plan for the down payment for a house. Dive into our detailed article for expert insights and advice.

1. Save up for your deposit

This might seem simple, but saving up for the deposit usually a) takes the longest and b) is the toughest part. For the most part, you’ll want to prepare at least 20% for the home deposit, but depending on your situation, you could also get a loan with as little as 5% of the total price of the home.

20% is a common initial deposit. Any less than that and you’ll have to also get Lenders Mortgage Insurance (LMI), which protects your lender in the case that you’re not able to make your repayments. They’ll give you the option of adding it into your monthly mortgage repayments or you can pay it all in one go. 

How much Lenders Mortgage Insurance you pay depends on your deposit. For instance, if you’re paying only 10% deposit, someone paying 15% deposit will pay less LMI than you. 

Navigating the hidden costs when buying a house? As you explore, it’s important to note that many Australians also seek out loans for small-scale farming ventures. Learn all about hobby farm loans, a popular choice for those dreaming of owning their own little piece of agricultural paradise!

2. Show that you have a stable income

Imagine lending your money out to a friend. You’d feel less secure if that friend had little financial stability and no job prospects, right? In the same way, banks and lenders want to know that you’re responsible enough to hold down a steady job. You might be employed at a company or work for yourself, either way, they’ll ask for proof of your income when considering you for the loan. 

Duration of employment is a factor ie: working at a company for more than six months is a good indicator of your commitment.

If you’re self-employed or a contractor, you’ll need to prove that you’ve worked independently for at least a couple of years. This depends on your lender and occupation

One thing to note is that getting a new job can impact your home loan application. However, if it’s a higher paying job and a better position, this will be positive.

When asking for this kind of proof, you’ll need documentation. For those employed by an institution, give your last few payslips. They might also request a letter from your company as additional support. The self-employed will need tax statements from the last two years.

Each source of income will need its own proof as well, so if you have multiple sources, offer them all.

While navigating the home loan landscape, it’s crucial to understand all its facets. Don’t miss our dedicated guide on What Is Assessment Rate in Home Loan? – a perfect complement to this article.

3. Become financially responsible

getting a home loan financial stability

The people assessing your case at the lender’s are professionals. They’re experts at reviewing your finances to spot any red flags or your inability to manage your money. 

They’ll analyse your debt to income ratio, meaning any debts, student debts, credit cars or other loans you have should be paid off before you apply for a loan. 

You’ll also want to avoid taking out loans during the application process or defaulting on credit card payments. 

If you are getting ready to buy property and want to reduce home loans in the future, there are ways to do this, like applying for smaller lines of credit and paying them off responsibly.

Remember that the initial deposit isn’t all you’ll have to pay for. Prepare for other costs like insurance and stamp duty. Check out our article to see the full list. 

Make sure you’ve had a good, hard look at your finances and that everything is in order before you take the leap. You don’t want to be making a commitment which will put a strain on your day-to-day. 

A Must-Read: To supplement the insights you’re gaining here, we highly recommend our top-tier hub article that thoroughly explains what is mortgage stress. It’s a comprehensive resource that shouldn’t be missed.

4. Research home loans

You’ll want to do your research on getting home loans like the products, their interest rates and which ones would suit you best. If you’ve done your homework, you’ll know how much you can afford as well. 

It’s a borrower’s market out there, which means you’ll have your pick of the litter. Many lenders will offer competitive pricing so shop around and negotiate when possible.

You can also speak to a home loan provider/broker to better navigate your choices. Here are a few general home loans that you’ll come across:

Fixed Rate Home Loan

Fixed rate home loans means your mortgage repayments will stay the same for however long you agreed to in the contract. So regardless of interest rate fluctuations, you won’t pay more or less each month. What’s good about fixed rates is that you know what to expect each month and can budget accordingly. 

Variable Rate Home Loan

Variable home loans are also popular. You might start out with a lower interest rate which changes according to the market rates set by the Reserve Bank. The downside is that repayments may vary, so that’s out of your control. On the plus side, you can package credit or debit cards with these types of loans. 

Home loans with redraw facilities 

The third common home loan allows you to top up your repayments when you want and those repayments can be withdrawn later on. The benefit of this is tax reductions but you’ll want to speak more thoroughly about this with your lender. 

getting a home loan saving for deposit

5. Getting pre-approved for a home loan

Now you’re at the final stage of getting your home loan. When all the administration has been taken care of and the paperwork filed, your lender will give you a pre-approval certificate or a home loan guarantee. This is important to have because most sellers will require a pre-approval before they accept an offer. 

Make sure you look through the document and check how long the certificate is valid for. It sometimes takes months to find a house and if the pre-approval is past its date, you will have to reapply. 

Just remember an important aspect of applying for a home loan is considering your future: are you going to start your own business? Get married? Have children? These sorts of questions will help you and your lender best determine the right home loan option for you.

Need more financial advice?

Browse our finance category. It’s chock full of hacks and advice from industry professionals. And remember to download the Soho app for quicker browsing and property matching. It’s getting you into your dream home faster!

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