Buying a home is not only a significant life decision, but a big financial commitment too. Considering most home loan terms last for 25 to 30 years, it pays to make sure you’re financially ready before you buy a house.
In this article, we take you through 8 steps to getting financially ready to buy a home.
A guide to deposits, pre-approval, & choosing the right property.
Before you even start looking at houses, take it back to square one. Think a bit more about your motivations for home ownership, and if it’s the best decision for you.
If you’re renting, you might want to weigh up the costs of renting versus buying to see which one would make more financial sense. Or, if you’re planning to move cities in the near future, you might hold off buying until you’re ready to stay in one place for longer.
If you’re still dreaming of buying a home, great! It’s time to dig down deeper into your financial circumstances to prepare for the buying process.
Now it’s time to take a look at what your finances currently look like. Reviewing not only your expenses, but your debts, assets and credit score too, is important to get you ready to buy. This is because lenders will assess all of this information in your home loan application to decide whether to lend to you or not.
Do you have credit card debt, a car loan, or a personal loan? Debts like this impact a few aspects of the home buying process. Firstly, having existing debt can limit how much money you’ll have available to make home loan repayments.
Secondly, existing debt like credit cards and personal loans can impact your borrowing power in the eyes of lenders. Lastly, debt can worsen your credit score, which needs to be solid before you start the home buying process, as lenders will assess this to determine your creditworthiness.
In addition to trying to pay down your debt, making sure your lifestyle expenses are reasonable and having substantial assets (like money in a savings account, for example) in the lead up to buying a home will be favourable with lenders.
Roll your credit card, car or personal loans into your home loan.
Once you’ve reviewed your expenses, assets, debts and credit score, you can begin figuring out how much you can actually afford to spend on a house.
Using a borrowing power calculator is a good way to help you understand what you could afford to borrow, and therefore what a reasonable purchase price for a home would be.
However, it’s important to remember that there are more costs to a home than just the purchase price - don’t forget additional costs like stamp duty, conveyancing fees and Lenders Mortgage Insurance (LMI) if your deposit is less than 20%.
Will you be changing jobs soon? Are you due for a promotion? Are you thinking of having children in the next few years? All of these and more are factors you might want to consider when you’re getting financially ready to buy a house.
This is because the type of house you buy might differ depending on your financial and lifestyle needs both now and in the future. So, it’s worth considering these before you jump into buying a one bedroom apartment when really a 3 bedroom house would be more suited to a growing family, for example.
Doing plenty of research is key before you buy a home. It’s important to research the real estate market in areas you might be keen to buy in, as this can give you an indication of how much you can expect to pay for a property.
A property report can provide an indicative price estimate guide, as well as sales and rental history for millions of addresses in the country. It’s based on local sales and real estate trends, so you get an accurate, up-to-date idea of how much you might expect to spend in your ideal suburb.
Search an address for price estimates and sales history.
When it comes to saving up a deposit for a house, generally the ideal number is at least 20% of a property’s purchase price. Having a sizable deposit saved not only demonstrates to lenders that you have good saving habits, but it also means you’ll avoid paying LMI. A larger deposit will also lower your loan to value ratio (LVR), meaning lenders will view you as a lower risk borrower.
However, we understand that a 20% deposit can be difficult to save for. Many lenders provide home loans for borrowers with deposits as low as 5%, however these can require the borrower to pay LMI.
First home buyers can also look into the First Home Loan Deposit Scheme that allows eligible borrowers to purchase a home with a deposit as little as 5%, and pay no LMI.
If you’re getting financially ready to buy your first home, it’s worth researching whether you’d be eligible for any government concessions or grants aimed at first home buyers. While they often differ by state in Australia, they can be a handy leg up into the property market.
Part of being financially ready to buy a home is knowing what home loan products are out there that suit your needs when it comes time to buy. Once you have any idea of how much you can afford, comparing home loans is a valuable way to see what interest rates and deals are out there that are right for you.
Lendi can compare home loan products from over 35 different lenders, giving you a comprehensive idea of what you can expect when it comes to finding a home loan to suit you.
If you need help in getting your finances in order or with the home buying process, Lendi’s experts are available to help at a time that suits you.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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