Getting your first loan means big numbers, tons of paperwork, and scary solicitors – and you’re not even guaranteed to get the money! Here’s 7 ways to boost your chances of getting the big tick from lenders when you’re a ‘nobody’ first home buyer.
First-time buyers are at a bit of a disadvantage with lenders because often, you have no leverage; no home to use as collateral, no loan payment history, and sometimes not even a credit score if you’ve never owned a credit card.
To prove your worthiness, you’ll need to have all your ducks in a row and show you’re a good financial citizen.
In fact, that really sums up the best tip we can give you: the more you can prove you’re able to repay a mortgage responsibly, the more favourably lenders will look upon you.
So, here’s your best steps to nabbing a mortgage as an ‘unknown’ in the lending world.
Step 1: Do your research (not just with Google, either)
You can read articles like this one all day, but in the end, you’ll only glean so much from Google. You’re best off asking experts to help you understand what you need to prove so you can get a mortgage, and how much money you should be aiming for.
That means talking to property professionals, both real estate agents and property builders. You’ll need to decide whether you want to buy an existing property or build a new one, and that’s a critical decision because there are more grants available to build new homes than there are to buy off the market (more about grants later).
It might mean that you can get a far better new home because there’s more grant money going towards it, possibly as much as $23,000 or more, which is nothing to sneeze at.
There are number of different loans available, including low interest, fixed or variable rate, and interest-only. It can help to research the types of loans before you talk to an expert, so you have some basic knowledge and you’re not swimming in new information.
Step 2: Check on and clear up your debts
When you’re applying for a mortgage, you’ll be asked to give a ton of information about your finances. That includes:
- How much money you owe in loans (like car payments or personal loans)
- The maximum credit limit on your credit card, because lenders will see the whole amount as debt
- Any other loans to your name, like HECS
The more debt you have, the more wary lenders will be. To make yourself debt-healthy, see if you can:
- Consolidate your debt into one loan, like a balance transfer on a credit card where you won’t pay interest while you pay it down, or into one personal loan
- Pay off anything you can
- Lower your credit card limit, especially if you never spend that much on it (lenders don’t care what your current balance is, they care about the maximum you could owe)
- Get rid of multiple credit cards if you have them
Step 3: Save for a deposit (but there’s a catch)
We know you know it, but do you know how much you’ll need to save? If you talk to a property expert who can give you an idea of property prices in your area, you’ll be able to calculate how much deposit you’ll need.
It might actually be a lot less than you think.
The sooner you can start putting money aside for a deposit, the sooner you can get into a home before prices rise even further. Considering you can get a home for as little as 2% down, you might only need a few thousand to look good to lenders and own your first home.
Set up a savings budget and commit to it. $200 a month adds up over a year or two, and can be the difference between lenders saying yay or nay when you apply.
Step 4: See what grants you can get (and maximise them)
The best ally you have is government grants, and there’s plenty of them these days. The grants mostly reward people building new, so make sure to factor that in when you’re looking at properties to buy and how much money you need to borrow.
It could be significantly cheaper to build a brand new property (and a lot more fun, since you can choose everything you love for your new place).
Here’s a snapshot of the grants you could be eligible for:
- First Home Buyers Grant: a cash boost for new buyers up to $15,000 (Queensland has one of the best FHBG deals in the country). You can use the grant money towards your deposit.
- Family Home Guarantee: a government-backed guarantee of 18% of your loan, so you only need to have a 2% deposit. You also won’t have to pay Lenders Mortgage Insurance.
- First Home Loan Deposit Scheme (also called New Home Guarantee): an application-based grant available to 10,000 new home buyers each year, guaranteeing 15% of your deposit so you only need to pay 5% down. The FHLDS must be used for a new home, not an existing one.
- First Home Super Saver Scheme: this let’s you use voluntary contributions you’ve made to your superannuation fund for your first home. If you’re saving for a deposit, this can also be a great way to save on tax while you shore up funds.
- Stamp duty concession: some states don’t offer stamp duty discounts, but Queensland does, giving you a 100% discount if the home is worth less than $500,000 (and then calculated on a sliding scale from there).
A finance expert or mortgage broker will probably know what you’re eligible for, but it’s a good idea to educate yourself, too. The grants are there to help first home buyers, so make sure you’re maximising them!
You can find out more about the Qld First Home Buyers Grant and your eligibility here.
Step 5: Understand low deposit loans
The fact is, it’s not as easy to get a home these days. Saving a 20% deposit can feel almost impossible, since it might mean saving a huge $100,000! Luckily, there are a bunch of low deposit loans available that mean you only need to save 2% (at a minimum) to qualify for a loan.
You’ll also need to understand Lenders Mortgage Insurance, which is a fee you’ll pay (added to your mortgage) if you put up a deposit less than 20%. For example, on a $500,000 home with 5% deposit, you’ll pay around $14,250. It might make your repayments slightly higher, but it does side-step amassing a six-figure deposit.
There are fewer lenders offering 2% and 5% loans, which means their interest rates might not be as competitive as other lenders’. A mortgage broker will be able to show you the difference in your repayments depending on how much deposit you can save, and what loan you’ll qualify for.
Step 6: Get your paperwork in order
When you work with a broker or finance professional to work out your financial position, you’ll need to show a bunch of information about your spending and saving. Be prepared with:
- How much on average you spend each month (make sure to include everything, from school fees to groceries, and car and home insurance payments)
- How much you earn each year (this will probably include providing tax returns for one or two years, depending on the lender)
- Proof of savings
- Any personal contributions to your superannuation fund
- Any other income you get, like government assistance
- Details about any loans or ongoing payments you have (credit cards, car payments, spousal maintenance or personal loans)
Gathering your information can also help you see where you’re overspending, how you can cut out some expenses, and if you can put any money aside for a deposit.
Step 7: Ask a mortgage broker to run the numbers
Your greatest champion in securing a loan is a mortgage broker. Most often, their services are free to use, because they get paid by the lender rather than you.
That said, choose a mortgage broker who isn’t allied to any one lender, and don’t go to a bank for a quote because you won’t get the best deal. Find an independent broker who’ll run your numbers against a pool of lenders to find the best deal for you.
They’ll be able to use your documents to determine whether you should provide one or two years’ worth of finances, which lenders will loan you more, and which have the most competitive interest rate.
It’s likely you’ll need to see a mortgage broker twice – once when you’re first looking into a home loan, and again once you’ve got a home in mind and know what amount you need to borrow.
Our team help everyday Australians find great homes and home loans to match, and we offer our help for free. You can contact us anytime for an obligation-free consultation on:
- What kind of home you could buy
- The best locations available today
- How much you’ll need to borrow
- The best loan type for you
Bonus tip: start now (future-you will thank you)
If you know you’re going to be looking for a home in the future, start looking like a money legend now, ie:
- Set up a budget to decrease your spending
- Set up a savings plan to get a deposit together
- Consolidate loans and pay off whatever you can ASAP.
Most importantly, lenders want to see that you’re not a flight risk – that you won’t default on payments, and that you’ll be a good money citizen who pays them their interest.
The more you can do to show you know how to save and have little debt, the better your chances of securing a loan. Even more importantly, you want to be sure you actually can pay the loan down without overextending yourself.
Owning a home is a joy, and shouldn’t be a financial burden.
If you need a hand getting started with finding out what you could potentially borrow, you can contact our team anytime for a free chat. We love to help brand new buyers get their first loan, and first home.
