Guides – Read Finance

Pre-Approval vs Pre-Qualified Home Loans

Guides

Pre-Approved vs Pre-Qualified – Home Loan Terms Explained

04/09/2023 Jesse Read

Some clients of mine have been using these terms interchangeably, not realising that both pre-approved and pre-qualified are two completely different terms when getting a home loan. Knowing the difference between the two is vital so you aren’t disappointed later on, and know the terms equips you with the right information.

If you have a pre-approved home loan it means that the lender has checked the information you have submitted and provided a figure they believe they may lend you, while a pre-qualified home loan provides you a figure the bank estimates it may lend to you without having verified your information.

It is important to note that neither of these guarantees that the lender will write the home loan. Your circumstances or the lender’s product could change from the time you received the information and the time you apply for the loan.

Pre-Approved

Getting a pre-approval requires a lot of the same steps as applying for a loan, getting the lender to assess your situation to provide an amount that they may lend you.

Information provided to the lender includes:

Income
Assets
Liabilities

Pre-approval comes with more weight than a pre-qualified loan due to the verified information. Though this still can be affected by property valuations, changes in circumstances and property types. A good example would be if someone applying for a loan lost their income source or job.

Pre-Approval Process

The process to obtain a pre-approved home loan is as follows:

Meet with your mortgage broker
At Read Finance we would first have a complimentary meeting to find out what you are after and to see what your financial goals are. Here we can provide you with documentation and answer any questions you may have. We will stay in touch with you through this process and after.
Documentation Request
You will need to provide the information and documentation that we request to fulfil the lender’s requirements and our compliance.
Conditional Pre-approval
Also known solely as a pre-approval, it will have requirements and conditions listed needed for them to provide the home loan to you.
Search for a Home
You now have an idea of how much the bank is willing to lend you as well as the conditions and additional requirements that you need to fill. Use this information while searching for your new property.

Common Conditions for a Pre-Approval

The conditions that a lender could give you varies for each person due to different lender product and current lender requirements. but here are some common conditions you may be provided with.

No changes in your financial position.
Verification on details you have provided.
A valuation of the property that satisfied the lender.

These will be provided to you so you will be well aware of what they are.

Pre-Qualified

Getting pre-qualified will provide you with an estimate of how much you might be able to borrow from a lender. This is done without verifying your financial information and in turn, means that you have not applied for a loan.

Get Help

Getting professional help for one of the largest purchases in your life is important. Reach out to us at Read Finance and let us help guide you through the process.

Book a complimentary meeting where we can assess your situation and talk about whether you’re interested in a pre-assessed or pre-qualified home loan.

Guides

How to Avoid Paying Lenders Mortgage Insurance (LMI) in Australia

28/08/2023 Jesse Read

Lenders Mortgage Insurance (LMI) is a one-time, non-refundable fee that borrowers in Australia might have to pay when acquiring property. It serves as a safety net for the lender in case the borrower defaults on the mortgage.

For many prospective homeowners, LMI can add a significant cost to the home buying process. In this article, we’ll explore strategies to avoid paying LMI in Australia.

Understanding LMI

Before diving into how to avoid LMI, it’s vital to understand what it is and when it’s applied. Generally, if you’re borrowing more than 80% of the property’s value the lender may require LMI to offset the risk. Each lender has different products with varying terms that may affect if you need to pay LMI. I will go over these in more detail below.

Often clients of mine and the general public have been confused about which party this insurance protects. It only protects the lender in the case someone defaults on their repayments but is paid commonly by the borrower.

Save for a Larger Deposit

The most straightforward way to avoid LMI is by saving a deposit of at least 20% of the property’s purchase price. Saving for this amount of deposit is challenging for some, which is why budgeting is important.

Tips for Saving:

Budgeting: Outline your monthly expenses and identify areas where you can cut back. Doing it once provides you with a great overview of your previous spending, while continuously keeping track can help you maintain the saving goals set.
High-Interest Savings Account: Utilize an account that provides good interest on your savings. When putting away saved money for specific periods of time, these are seen commonly as low-risk investments.
Government Schemes: Schemes available for first time homeowners like the First Home Super Saver Scheme (FHSS). Check with your mortgage broker to see what government schemes and grants may be available to you.

Consider Family Guarantees

Some lenders allow immediate family members (usually parents) to use their property as security for your loan. This method can sometimes eliminate the need for LMI, as the lender has additional collateral.

Things to Consider:

Legal Advice: Both parties should seek legal advice to understand the responsibilities and potential risks involved.
Relationship Dynamics: Be clear about expectations and responsibilities to prevent future misunderstandings or disputes.

Explore Professional Packages

Certain professionals like doctors, lawyers, and accountants may be eligible for LMI waivers or discounts due to their generally stable and high-income employment. Each lender has different criteria, so it’s worth investigating if your profession qualifies.

Negotiate with the Lender

In some cases, lenders may be willing to waive or reduce LMI if you present a strong case, such as:

Stable Employment: Proof of a stable income and job security.
Good Credit History: A clean record of managing debts responsibly.
Other Assets: Having other assets might reduce the lender’s perceived risk.
Promotions: The lender may have a promotion running changing the requirement for LMI.

Opt for a Smaller Loan

Consider properties within your budget that would enable you to borrow at or less than 80% of the property’s value. While this might limit your options, it ensures that you won’t be subject to LMI.

Viewing properties at different price tags will give you a good idea of the difference in what getting a smaller loan could do for you. Not only could you find the property that you love, but you may be paying less due to the overall size of the loan or the interest rate.

Use a Mortgage Broker

A mortgage broker can help you navigate the complexity of different loan products and assist you in finding a lender’s product that suits your needs. This could save you time and stress knowing that you’re being looked after.

Contact us at Read Finance for a complimentary meeting to see how we can help you with your property finance.

Conclusion

Avoiding LMI in Australia could require careful planning, financial discipline, and a thorough understanding of the options available. By saving a larger deposit, considering family guarantees, exploring professional packages, negotiating with lenders, opting for a smaller loan, or using a mortgage broker, you can strategically reduce or eliminate the cost of LMI.

By following these principles and seeking professional guidance, the path to homeownership in Australia could become more affordable and within reach, without the burden of Lenders Mortgage Insurance.

Australian Home which shows the backyard, back of the house, and a pool.

Guides

7 Things to do before Getting a Home Loan

16/03/2023 Jesse Read

The reality is that most people in Australia are going to need to get a home loan in order to purchase their first home. As time has gone on, more and more requirements have been put into place on mortgage brokers to ensure that you get the lending product that suits your needs.

This article is going to go over 7 items that you may not have thought about prior to seeking out a mortgage broker or applying for a home loan yourself. Make sure you take notes on items that directly affect your current situation. Think about how you could use what is written here to better your situation.

1. Reduce Credit Cards

Having that plastic credit card in your wallet is great when used right, however the limit of each card is likely removed from the amount you’d otherwise be able to borrow. This means if you have credit cards with a limit of $50,000, that is $50,000 less you could borrow.

Not only that, the interest rate you’re paying on the balance. These are normally used as a convenience to gain points or rewards while making small to moderate purchases. Not for large purchases with a high interest rate.

So what can you do? Get rid of those cards that you aren’t using. Those you do keep, change the limit to something that you are comfortable with. Remember that lenders use the limit of the credit cards, not the balance you’ve currently used.

2. Clear Unsecured Loans

Unsecured loans are normally around 5-7 years long with a high interest rate. Not only do you owe what the balance is for that loan but also the interest over time. This increases your debt-to-income ratio, as well as your ability to repay a home loan.

Also if you have any principal only loans, it may be worth considering changing them to principal and interest to start paying off the balance of the loan.

3. Living Expenses Budget

Spending too much is also one way that affects how much you can borrow when buying a home. Taking control of your spending 3-6 months from when you apply for a loan can really make a difference.

You can manage this by setting up a budget, if you’ve never done that before don’t be afraid as it can be very simple. One simple way is to categorise each of the debits on your bank statements to see where your money goes and what transactions you can save money on.

Lenders typically use something called the Household Expenditure measure which is commonly referred to as HEM. This is a minimum rate the lender uses as a person’s living expense and is different between lenders. So if you’re living on beans and rice but not getting the income required to service the loan, it won’t matter how much you save.

4. Refinance your debt

If you are getting a home loan or refinancing an existing one, you may have the option to refinance your existing debt into a home loan. This provides you with the option of making a single payment instead of multiple, as well as having an interest rate that is determined by what your home loan’s interest rate is.

5. Credit History

Although your credit score is not often used in Australia, your credit history is. Any blemish on your credit history could be the reason a lender chooses not to provide you with a loan.

By making repayments on time is one of the best ways to ensure your credit history is not negatively impacted.

6. Searching for Properties

Lenders take into consideration the property you are buying when you go for a home loan. These differ from one lender to another which could limit which lender you could get a loan from or the amount they’ll let you borrow.

Commonly you will see restrictions on these:

Studio apartments
Student accommodation
Inner city apartments
Properties under 50sqm
Rural and Remote properties
Stratum Titled apartments
Commercial zoned residential properties

7. Self-Employed and Tax

The last thing on this list you need to watch out for is if you are self-employed. Working with a great accountant can do wonders for the tax your business owes as well as putting in place various tax efficient strategies. It is worth knowing that a business with low profit restricts the amount you could be eligible to borrow.

Make sure if this is the case for you that you reach out to your tax accountant and discuss the options available for you. I would always recommend using one for anything to do with tax.

Conclusion

It doesn’t matters if you’re buying your first home to live in or as a wealth creation tool for your future. These 7 items are things you need to consider taking action on before getting a home loan.

Contact us at Read Finance if you are planning on buying a home, it is never too early and we can help guide you through the process as well as help find the home loan lender that best suits your needs.