How do I apply?
This will usually involve completing an application form (or submitting an electronic application), collecting and supplying required information/documents and signing required forms. Your mortgage broker will be able assist you through the application process and can also lodge the application electronically for you.
Do I need building inspections?
It is recommended to have the property inspected for any faults so you are fully aware of what you are buying into. The grounds surrounding the property, under the floor, into the roof and all through the house should be thoroughly inspected and recommendations documented.
Professional pest inspections should also be a part of this process. If you want to carry out these inspections your mortgage broker may need to insert a clause in the Offer. Speak to your mortgage broker for further information.
What documents will be involved in the application?
Typically you will be required to collect and submit documents, which may include the following:
- Loan application
- Proof of identity – documents to satisfy 100 point check
- Privacy declaration – your permission for the lender and other parties to access and share personal information about you, including your credit history
- Documents to verify your income and financial circumstances)
- Contract for the purchase of your property
How will the lender make the decision to lend me money?
While all lenders have different policies and procedures for deciding on whether to lend money, typically they will look at the following items below.
Credit history – Whether you have a previous good history of paying off your loans or any history of not repaying debts. The lender may request a report on your credit history from an external bureau. The report will list information concerning your credit history, including previous credit applications and defaults if you have failed to repay any other debts.
Serviceability – Whether your income is going to be sufficient to allow you to repay the loan. The lender’s assessment will also take into account your repayment requirements on any other existing debts (such as car loans and credit cards). The lender may seek to verify your income. This could involve contacting your employer to confirm your employment and salary, or calling your accountant if you are self-employed. The lender will usually use a loan calculator to work out whether your income is enough to allow you to repay the loan.
Deposit – The amount of money that you contribute as a deposit. The more deposit that you contribute, the more the lender may be prepared to lend you.
Loan to Valuation Ratio (LVR) – This is the term that lenders use to define the proposed loan amount as a percentage of the property value. Lenders generally utilise LVR based limits to determine the maximum amount they will lend, for any given property value.
- The lender may seek to check the valuation of the property that you are financing. There are various ways of doing this, ranging from a desktop valuation (comparing the value of your house to other recent sales in the local neighbourhood), to a full valuation by a licensed valuer, including an internal inspection of the property. The lender may sometimes request you to arrange access for a valuer to inspect your property and may require you to pay for the valuation.
- Sometimes the lender’s assessment of the property value may be less than your estimate, or less than you actually paid for the property. The valuation of the property is important to the lender, because it affects their Loan to Valuation Ratio (“LVR”) calculation. Depending on the lender’s LVR policies, this may impact the amount they are prepared to lend to you.
Lenders’ Mortgage Insurance (“LMI”)
- LMI is an insurance contract for the benefit of the lender, which allows them to recover certain losses if you default against your loan and they are not able to recoup the debt and their costs via other means. Most lenders require certain loans to carry LMI. If required, your mortgage broker or the lender may arrange for your loan application to be sent to an LMI insurer. The LMI insurer will also perform a credit assessment on the loan application and will advise the lender directly whether or not they are willing to insure the loan.
- If the loan LVR is above a certain level (generally 80% for a Full Doc loan), then the lender may require you to pay the LMI premium. Most lenders will add the LMI premium to the loan amount, so you don’t need to have the money available in advance.
- Sometimes, the lender will pay the LMI premium themselves, at no cost to you. Generally this will only apply on loans with an LVR below a certain level, for example, 80% or less on a Full Doc loan.
After the lender has taken the above information into account, they will make a credit decision to approve or decline the application.
What are the types of credit approval?
- Indicative – May be advised by a lender based on a general description of your circumstances, prior to you lodging any formal loan application. Not a loan approval, but rather, an informal and indicative advice that you appear to satisfy the lender’s general criteria for a given loan. Can be helpful during the shopping phase to get comfort over how much you can borrow.
- In-principle – This is a firm indication that a formally lodged loan application initially meets the lender’s criteria, when the applicant is not in a position to supply some critical details. Generally this is because the property has not yet been purchased. Can be useful to “lock-in” finance before you actually purchase a property, for example, if you plan to bid at an auction or plan to make an offer in a private treaty sale.
- Conditional approval – A firm approval in response to a formal loan application, but the lender has a specific requirement that must be satisfied before they are prepared to make the approval unconditional. For example, conditional approval subject to you providing proof of your income, or subject to the lender obtaining a satisfactory valuation of your property.
- Unconditional approval – Fully approved, without any conditions. In the next step, the lender will make a formal loan offer and supply formal loan documents. From this point, the process can move into the fulfilment stage.