There are a number of factors that will effect if you qualify for finance in order to buy a house and land package. Typically your bank or a broker can help you with this and organise a pre-approval for you. You can use the checklist below to get started before you meet the financial people.
(Please do bear in mind that once you sign forms and ask a financial person to work on this for you, they will take some actions which show on your credit history: this is perfectly fine and usual, but do not do so with multiple brokers simultaneously because it may then look like you are having trouble getting a loan.)
Factors that effect your ability to borrow money might include:
The amount of deposit that you have saved will affect how much you can borrow
By scraping together a deposit, or having ‘equity’ in another property that you can ‘release’ you show the financial institution that you have started your journey. They will be able to lend you a percentage of the value depending on that financial institutions lending ratio.
If there ratio is 90 %, then you can effectively borrow 9 times the deposit that you have saved, BUT you must remember that you cannot finance the stamp duty, so you will need to be able to pay that too.
LMI - Lender Mortgage Insurance
Some financial institutions will be able to lend more than the base amount if you enter into a different agreement with them, where they improve the security with ‘lenders mortgage insurance’ which may essentially allow you to borrow a higher percentage of the property value form them. This would be only offered to you if you can demonstrate ‘serviceability’.
Serviceability will be an important consideration
The bank needs to be able to justify lending you the money and will need to validate that you are earning enough money to be able to make the repayments. They will consider a number of elements:
- Your type of employment and the extent too which your employment history conveys continuity and a source of income that means that you should be able to make the repayments. They typically look favourably at full time employment and consistency of employer;
- Your amount of income, compared to your amount of ‘outgoings/expenses’ which means that they can make an evaluation to check that you should be able to make the repayments;
- Your existing debt levels which means that they will consider things like your credit cards. Don’t worry too much about this though because you may actually mathematically improve your financial position by converting high interest credit card debt to lower interest home loan rates: you will need to talk to the financial advisor about how relevant this is for you;
- Your existing property situation will be taken into consideration as part of the path you are taking:
- for instance are you planning to move into this property in which case you may save rent?
- Or are you planning for this to be a first home purchase in which case you may qualify for a first home buyers grant?
If this is to be an investment property, then what rent will you reasonably be able to receive which will help with the loan repayments?
Previous and existing borrowing history
The financial institution will obtain your signature to do a check and prepare some forecasts with a view to letting you know if they can lend you money and, if so, then how much. One component of this will be checking your credit history. It is a good idea to approach your credit position in a proactive way for the time before you need a loan.
