Have you been looking at becoming a home owner or buying a larger property which may require you to take out a home loan? In the last couple of years, banks and financial services providers have become increasingly stringent on the application process and their lending criteria. Applicants need to have their financial affairs in order before thinking of applying for a loan.
If you have made a resolution to buy a new home in 2017, you will need to have access your financial situation and asked yourself these six important questions before approaching your local bank for financial assistance. Some countries have much stricter credit and lending regulations, however, at the moment less than 50% of all bond applications are actually approved, mainly due to missing information or applying for more credit than you are able to afford.
So Here Are The Questions To Ask Yourself Before Applying For A Home Loan
What’s My Credit Score?
You may have heard the term “credit score” before, your credit score is an indication of how good you are at borrowing and repaying money. A good credit score and credit record are extremely important in the application for a home loan since it is a high value transaction. Depending on your country, your national credit bureau should be able to issue you with a credit report and your subsequent credit score.
You credit score is influenced by a number of factors, some of which include: missing repayments, opening too many accounts, only paying the minimum repayments etc. All of these affect your credit score and may deter potential lenders, especially with high value transactions.
What Is My Annual Income?
The maximum bond amount you can apply for as an individual or as a married couple is most likely based on your individual or combined annual income. When stating your annual income, remember to include items such as rental income, performance bonuses and investment returns. Your annual tax return is an important document which should provide a comprehensive list of all of your income sources.
What Debt Do I Currently Have?
After banks have looked at your annual income, they will calculate what your “disposable income” is. You will have to provide your bank with a list of all of your monthly payment commitments, repayments on credit cards, vehicles, insurance, taxes and rates, levies etc. The bank will then calculate your debt to income ratio which is used to determine your affordability, an individual with too much debt is a higher risk to banks than one with very little debt.
Try to pay up as much of your outstanding debt as possible before applying for a home loan to improve your affordability and improve your chances of your bond being approved.
What Is My Net Worth?
The bank will then look at your “net worth” which is calculated by adding up the value of all of your assets such as vehicles and houses and the subtracting any outstanding debt you have. The difference is your net worth or the amount of money you would have if you sold all of your assets and settled your outstanding debt. A higher net worth means that you are less of a risk to the bank as you will be able to pay back any shortfall should something happen to the property.
There is not much you can do to improve your net worth significantly in a short period of time.
What Deposit Can I Afford?
Depending on your country, banks will likely require first time buyers to put down a deposit when purchasing a property, this is typically around 10-15% of the purchase price of the property at the moment.
When working out how much you can afford to put down as a deposit, remember to include cash which you have available now as well as any money you will make on the sale of existing property or assets before you buy the house. Remember to subtract transfer fees, bond costs and lawyers fees applicable as these will be payable soon after the acceptance of the offer to purchase.
What Monthly Loan Repayment Can I Afford?
Before you even start looking at houses you should have an idea of what you can afford to repay monthly. It is easy to get an idea of what sort of price range you can look at by using an online bond repayment calculator.
Typically, your monthly home payment which includes the bond, interest, taxes and insurance should be less than 30% of your monthly income. Any more than this and your bond will likely not be approved.
Try to keep the monthly repayment as low as possible and owning a home is a long term investment. You need to consider future expenses as well such as children, tuition fees and new vehicles. Always purchase a property which you can comfortably afford and do not stretch your budget to obtain a property as it will place unnecessary stress and risk on your financial situation.
Was this article useful? Do you have any other questions which you think should be asked before applying for a home loan? Let us know in the comments section below!
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