Navigating the process of buying a property can feel intimidating for most first homebuyers.
Their biggest questions revolve around the amount required for a down payment and how to get a loan.
Answers to both these challenges involve the word “depends”, which is frustrating. So, let’s try to break this down.
What’s the deal with a down payment?
Firstly, let’s dispel the myth that you need 20% of the property’s value.
You can obtain a mortgage with a 3%-5% down payment, depending on your lender and personal circumstances.
Here’s what to do next: Let’s assume you need 5%; track the values of your target homes and calculate 5% of their values. Voila! You’ve got the sum required for your down payment.
Obviously, values tend to rise and fall depending on the mood of the market. In a rising market, first homebuyers can feel they’re chasing their elusive down payment goal because it keeps increasing.
The only way to counter this scenario is to try to save for your down payment as quickly as possible.
Obviously, for young people paying rent and coping with the cost of living crisis, this is easier said than done. There’s no intention to sound flippant about this challenge.
Okay, let’s step through the loan process.
You don’t get a loan straight away. Instead, you get what’s called a “pre-approved loan”. It’s a conditional promise of what the lender will allow you to borrow.
Here’s the upside – a pre-approved loan gives you a spending budget.
But here’s the other side of the coin that most folks forget – pre-approval does not mean the lender is guaranteed to give you the money.
It will only do this when it has reassessed your financial outgoings – income and outgoings – and put a valuation on your target home.
If the lender thinks you’re overpaying, it will either reduce the amount it is prepared to risk on you, or it will refuse to move forward.
Let me stress, this scenario is very rare.
If you choose an experienced agent to help you purchase, the likelihood of you overpaying is remote. I’ll be happy to assist you.
Here are some more observations:
Pre-qualifying for a mortgage – Approach a mortgage broker or loan officer at your preferred retail bank. They will step you through the process. Each lender has a slightly different approach. A pre-qualified loan usually expires after 12 weeks.
Why use a broker? – Brokers offer mortgages from a range of lenders. They should be experts in helping you make an application. Their services are free as they earn commissions from the lender that you decide to use.
Why use a loan officer? – A loan officer will be keen to book your business. However, be aware they will only offer mortgage products available from their employer. Your choice will be limited compared with using a mortgage broker.
Credit score – To qualify for the largest loan possible, you’ll need a good credit score. A score of 700+ is exemplary. A lender may restrict your borrowing limit if your credit score is low. If that’s the case, work hard to turnaround that situation. A mortgage broker can assist you with this process.
Crush your debts – One criteria a lender will apply is called the debt-to-income (DTI). It’s calculated by dividing your gross income by your monthly debt payments. You need a ratio well below 50% to get a reasonable loan for the current market.
Teamwork – Of course, your challenge is halved if you are purchasing with your partner. By doubling the income, you will obtain a larger loan and have greater buying power. In most cases, ownership of the asset will be shared, too.