How important is the finance component to the property buying process?
In fact, aside from choosing the right property, in the right location, finance is the most important component to property investment. So, it’s essential to get it right.
But nobody’s born knowing this stuff. And many financial institutions seem to love making the process harder than necessary. That’s why the team at Capital Properties are passionate about helping Defence Force members improve their financial literacy and get started on their home-buying journey and/or increasing their property investment portfolio.
And because forewarned is forearmed we’ll break the process down here.
On the go? Here’s 30 seconds of take outs:
- The Capital Properties Discovery Session preliminary assessment is an essential starting point to work out your financial capacity.
- You’ll need to submit some key supporting documents for a home loan, including, but not limited to: ID, proof of income, a list of assets and liabilities.
- We recommend you apply for Approval in Principle (AIP) when you’re ready to commit to searching for your property. This will give you an idea of how much you can borrow.
- Once you’ve found the right property, it’s best to start applying for unconditional approval asap.
- You’ll need formal/unconditional approval to confirm the loan.
- Once the loan’s been approved, you’ll need to sign mortgage documents to prepare for
- After settlement a ‘Transfer of Land’ document will be registered at the State/Territory Land Registry Office on your behalf. And as long as everything has gone to plan, you’ll get the keys to your new property! Hurrah!
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Before you even think about browsing the property market, you’ve got to do some due diligence and nut out where you stand financially. We make this process really straightforward in the Capital Properties Discovery Session. In just one meeting we’ll help you collect all the information you need to provide to the finance broker/lender to work out your financial capacity.
We’ll work through a preliminary finance assessment form that details your assets, liabilities, income and investments which will help your Finance Broker to work out exactly what your borrowing power is. But that’s just step 1. We’ll talk you through all the stages you’ll face in a home-loan application here. It sure seems like a lot, but we promise you, doing it properly the first time is worth the effort in the long run.
LOAN PROCESSING STAGES
- Prepare supporting documents
Here’s a comprehensive list of the documents you’ll need to provide the bank/lender for a home loan application.
That means your passport, driver’s license, and/or state or territory-issued photo ID card such as a ‘Proof of Age Card’. If you can’t provide at least one of these primary IDs, then you’ll need to present two forms of secondary ID such as: your birth certificate, Medicare card, tax assessment notice, citizenship certificate, utility bills with name and current address and/ or debit/credit cards.
Proof of Income
This is a biggie, as your income determines your borrowing power. If you’re an employee, you’ll need to present:
– 3 latest payslips.
– Employment contract or a letter from your boss that details your employment contract, how long you’ve been working there and confirmation of your basic pay (salary) as well as any allowances (e.g. additional allowances for exercises and deployments).
– Last 3 months of bank statements showing your income.
– Most recent tax return and ATO notice of assessment.
If you’re currently self-employed, you’ll need to go back even further! The lender will want your last two years personal and business tax returns and Australian Taxation Office (ATO) assessments. As well as the last two consecutive years’ profit and loss from your business.
If you receive a government income, they’ll need to see a letter from Centrelink confirming your benefits.
The lender will also need to see evidence of any other sources of income, such as:
- Share dividends
- Foreign income
- Rental income (along with a letter from your real estate agent confirming the income and a copy of your current Residential Tenancy Agreement and bank statements showing rent payments)
A list of Assets
As well as the above sources of income, you’ll also need to provide details of any assets you hold. That includes savings (you’ll need to show them your bank account), any vehicles that you own outright, share investment portfolio and your superannuation.
List of Liabilities
You’ll need to confess any outstanding debts, such as credit card balances and ongoing loan repayments.
- Prepare deal for Approval in Principle (AIP)
Now that you’ve collated all the necessary paperwork, the next step is to get a clearer idea of how much you can borrow. This will allow you to narrow down your search for suitable properties and place you in a much stronger position when it comes to making an offer. We’ve explained why this is so important in “Why being finance ready pays dividends.”
Ideally, you’ll want to apply for AIP when you’re ready to commit to searching for your property. You’ll need to do your homework to choose a lender that offers a loan that suits you or discuss potential lenders with your finance broker. They’ll want to see all the supporting documents, confirmation of your deposit amount and an idea of the price range of the property you’re looking for.
- Sent for Approval in Principle (AIP)
Once you’ve submitted your application for AIP, the lender will complete a full credit assessment and responsible lending assessment, which includes details about where you’re looking to buy and the type and size of property you’re looking at.
Applying for AIP is free and usually lasts for 90 days once approved, assuming your circumstances haven’t changed in the meantime.
- Approval in Principle issued
If your AIP has been issued by the lender, you’re ready to start property hunting! Yay! Just remember that if anything significant in your life changes, e.g., your income, employment type or expenses, you must advise the lender as it can affect how much you’ll be able to borrow. If you haven’t found a property or signed a contract within 90 days, you’ll need to re-apply for another AIP.
- Prepare deal for formal approval (unconditional)
AIP doesn’t guarantee approval for a home loan. If the property that you want to buy doesn’t meet the lender’s loan-to-value requirements or you’ve had a change in your life that affects your financial situation, formal approval might be declined. So, it’s important to start moving towards applying for unconditional approval as soon as you’ve found the right property.
You’ll need to supply the ‘contract of sale’ or ‘offer and acceptance’ on the property and confirm that your financial situation hasn’t changed. They’ll also ask you to submit First Home-Owner Grant forms (if that applies). We’ve discussed everything you need to know about First Home Owner Grants in The Defence Force First Home Buyers Guide.
- Deal is sent for formal approval with no valuation
If you have more than a 20% deposit some lenders won’t require a physical property valuation before formally approving the loan. Many banks now use electronic valuation services like RP Data to confirm the property’s value. This blog post explains the process of valuations here in Australia: Desktop, kerbside & full property valuations – what’s what?
- Conditional approval – deal has been conditionally approved by the lender
Conditional approval means that your lender has assessed and approved your loan based on the information they’ve already received. However, they may still impose restrictions or “conditions” before formally approving your home loan, so conditional approval is not a done deal.
- Deal is sent for formal approval with valuation
This is often the last step for unconditional approval. Your lender will request a formal inspection of the property. That means that an independent property valuer will be appointed by the bank to physically visit the property and confirm its valuation. This valuation is then submitted with your loan for formal approval.
- Formal (unconditional) approval
It’s time to celebrate! Formal, or “unconditional” approval of your home loan means that all your hard work has paid off and the lender has approved your home loan based on the property you’ve chosen to buy. Although you’re not completely done just yet, just a few more steps before you can call that house yours!
- Mortgage documents issued and posted
Your lender will now send you confirmation of your loan – or your ‘mortgage documents’, to read, sign and return. These will include:
- A letter of offer detailing the conditions of your home loan. Make sure you take time to read these, along with your lender’s terms & conditions.
- Mortgage document – a copy of this will be lodged with your State or Territory to register your mortgage.
- Witness acknowledgement – you’ll need to get an independent witness to confirm your identity.
- A disbursement and settlement form that will allow the bank to withdraw funds from your account to pay the amount due for settlement.
- Mortgage documents returned
As conditional approvals are only valid for a few months, it’s vital to get them signed and returned to your lender as soon as possible to allow you to settle on your new property. Once your lender has received your signed mortgage documents the next step will be the settlement process.
- Ready to settle
Settlement means you’re ready to transfer ownership of the property from the seller across to you, the buyer. Your solicitor /conveyancer will agree on a date, place and time of settlement. Two weeks before that date your solicitor will prepare a ‘Transfer of Land’ document for you to sign. This will then be registered at the State/Territory Land Registry Office on your behalf.
- Settlement booked
As well as the exact time of settlement, your solicitor/conveyancer will confirm the amount of funds that you’ll be required to provide. The funds need to be in your account at least a few days before settlement.
- Settlement has occurred
As soon as settlement has taken place, your solicitor/conveyancer will confirm by sending you a ‘Statement of Adjustment’ to confirm that funds have been paid. Now you can arrange to pick up your keys from the real estate agent and give yourself a pat on the back! You’ve just bought yourself a house!
In the unlikely event that there’s a problem with the deal and it can’t proceed, (for example in case of a fraudulent representation), the deal will be automatically archived after 2 weeks.
Although it seems like a lot, understanding this process will make buying a property so much easier. So, well done! If you’ve made it this far, you’re already ahead of the game. The reality is managing the finance component of buying a property is one of the most stressful events many of us will undertake in our lives.
That’s why we’re happy to lend you a helping hand to get you through the process. We’ll get you up to speed with our Capital Properties Discovery Session before you apply for a loan and help you clear any hurdles along the way.
Our Pinnacle Support Program will support you in finding out more. While you’re here, you can also check out our free investor tools: Online property investment toolkit | Book Your Pinnacle Program Review | Property Investor – Self Evaluation
Guest Blogger: Brian Beck | Mortgage and Financial Consultant