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Home loan formal approval process and terminology explained

Wednesday, October 14, 2020

There’s nothing like being formally approved by a lender for a home loan. It’s your green light to buy the property you have your heart set on. Borrowers who have taken the necessary steps in the pre-application phase will be in a strong position to secure the property they want.

Here, we explain how to get formally approved. Whether you’re buying your first or second home, investing in a property or refinancing your home loan, we’re here to help. As your mortgage broker, we can support you through the process and do the legwork for you.

Formal home loan approval requirements

Getting pre-approved (also known as conditional approval) is usually the first step before starting the property search. This will require you to meet the lender’s borrowing criteria and provide various types of documentation, which may include:

Identification

  • Photographic proof of identity such as a driver’s licence or passport.
  • Secondary documentation such as a Medicare card, rates notice or utility bills that are no more than three months old.

Proof of income and savings

  • Lenders will want to know how much you earn to see if you can service a loan.
  • They may ask for payslips, bank statements, group certificates, Notices of Assessment and written references from your employer, for example.

Assets and liabilities

  • You’ll need to declare everything you own, plus all outstanding debt.
  • Assets might include things like savings accounts and/or term deposits; liabilities could be credit cards and personal loan debts.

Current expenses

  • The lender will want a comprehensive list of your current expenses, with everything from your utility bills to your weekly coffees.

The process

Step 1: Gather all necessary documentation & submit your loan application

Unconditional approval (or formal approval) happens once you have met all of the lender’s conditions and they are satisfied that you qualify for the loan. There’s usually a stipulation in your contract saying ‘subject to finance’ when you make an offer on a property, so that you can apply for formal approval.

As your mortgage broker, we’ll help you gather all of the necessary documentation and submit your application. The lender will then arrange a valuation and assess the property. The timeframe for reviewing and processing your application will depend on your situation, the settlement period, as well as the lender’s service levels and seasonal peak periods such as EOFY and Christmas.

Step 2: Review the paperwork

If approved, you’ll receive a confirmation letter and final loan documents to review, sign and return to the lender (it is recommended to get your solicitor to review these). Many lenders now offer the convenience of digital document signing.

Step 3: Talk to your broker about insurance

You may be required to take out building insurance. If you’re an investor, you may also need landlord insurance. Speak to your broker about the right insurance for your needs.

Step 4: Do a final inspection

After this, you should arrange a final inspection of the property before settlement to ensure everything in the contract of sale is in working order.

Step 5: Settlement

Your settlement agent will meet with the lender and the seller’s representatives to exchange documents and the balance of the purchase price will be paid to the seller.

Step 6: Enjoy your property

Collect the keys and do a happy dance! The property is now yours.

Common terminology

Buying a property is a big deal, and if it’s your first time, you might be hearing a lot of unfamiliar phrases and terminology. Here’s a breakdown of some common terms.

  • Application fees (or Establishment fees)
    Charges you may need to pay a lender to cover the costs of processing your loan application.
  • Comparison rate
    An indication of the true cost of a loan over time that enables you to compare between lenders.
  • Conveyancer
    A licenced professional who provides advice and represents you during the transfer of property ownership from the seller to you.
  • Credit rating
    An evaluation of the credit risk you pose to a lender, based on your borrowing and repayment track record.
  • Deposit
    A percentage of the price you need to pay upfront when purchasing a property.
  • Equity
    The difference between the current market value and the amount outstanding on your loan.
  • Guarantor
    Someone who pledges to guarantee payment of your loan in the event you default.
  • First Home Owner Grant (FHOG)
    A government-funded scheme to help first home owners buy or build a home.
  • Fixed interest rate
    An interest rate that’s locked in for a set timeframe, meaning your repayments will always be the same during the “fixed” period term.
  • Lender
    A bank or home loan provider.
  • Lender’s Mortgage Insurance (LMI)
    An insurance some borrowers need to pay to protect their lender if they default on their mortgage.
  • Loan term
    The duration for the loan to be repaid.
  • Loan to Value Ratio (LVR)
    The amount borrowed divided by the property’s value.
  • Monthly fees
    Ongoing lender fees associated with the loan, as outlined in the loan contract.
  • Offset account
    A transaction account that’s linked to your mortgage. The balance reduces the amount of interest charged on your loan.
  • Owner occupied
    Means you intend to live in the property.
  • Principal & Interest Loan Repayment
    A loan where you repay part of the amount borrowed (principal), in addition to interest.
  • Pre-approval
    Conditional approval from a lender that indicates how much they might lend you.
  • Redraw
    A facility that allows you to make extra repayments on your mortgage and access the funds when needed.
  • Settlement
    The final step in buying a property, when legal ownership is transferred from the seller to the buyer.
  • Split loan
    A loan structure whereby a portion of your loan is charged at a fixed rate for a period, while the rest of the balance is charged at a variable interest rate.
  • Stamp duty
    A government tax attached to certain purchases, including real estate.
  • Valuation
    An assessment of a property’s value.
  • Variable Interest Rate
    An interest rate that changes throughout the term of the loan, meaning your repayments will fluctuate.