Are you thinking about buying a home, but feeling a little daunted about taking on a mortgage? Being prepared is the key to feeling confident, so we’ve got some tips on how you can get yourself financially prepared for a home loan.
1. Set your goal
Do your research and understand how much money you will need to meet the upfront costs of a loan, such as the deposit, as well as the ongoing financial commitment of loan repayments. Most lenders will have online calculators, which make it pretty simple to get a breakdown of the costs, and don’t forget about some of the extra costs associated with buying a home.
2. Get a savings plan
How are you going to save the money required to cover the upfront costs? Be realistic about how long it will take you, and what you can afford to put away. Start making regular contributions into a savings account and look for a high interest savings account where it is difficult to access your money on impulse. Getting yourself into the habit of saving will demonstrate to a lender you can manage regular loan repayments.
3. Be aware of what you're spending
Tracking your spending will not only help you save for your deposit, but it will also help instill the discipline required to meet regular home loan repayments. There are plenty of apps around that will help you keep an eye on your expenditures, or check out Money Smart’s budget planner to get you started.
4. How's your credit?
A credit rating is an assessment of your ability to meet your financial obligations, based on your past financial management. A lender will use your credit rating to evaluate whether you will be able to meet your home loan commitments. Before applying for a home loan, it is a good idea to check your credit rating online to ensure it won’t impact on your ability to get a loan.
5. Well, you can improve it!
Making late bill payments or failing to pay your credit card on time are some of the activities that could lead to a poor credit rating. Establishing good credit habits, such as always paying your utility bills on time, will slowly improve your rating replacing any negative information. Don’t worry about old debts on your credit report – if you’ve paid it off it will show you’ve handled your debt well. The longer your history of good debt, the better it is for your score.
6. Your credit cards count
Credit card debt can have a serious impact on how much you are able to borrow – the higher your credit limits, the less you’ll be able to borrow, as lenders view your credit limit as a possible debt level in the future. This means that is it won’t matter if you owe $20 or $2000 on a credit card – it will be about how much you could owe. Cancel any unnecessary cards, and think about reducing you limit on the necessary ones.
7. Reduce your debt
Personal loans or store accounts are other forms of debt that are likely to impact on how much money you can borrow. Try to pay-down these debts as much as possible before applying for a loan and limit the amount of new debt that you take on.
8. Develop good habits
Making rent and other bill payments on time will demonstrate to a lender that you have an ability to service a home loan. Along with a good track record of regular savings, good money management behaviors provide lenders with comfort that you will be able to meet your loan repayments.