Buying a house requires careful planning, not just in terms of the house you choose but also how you’ll pay for it. Understanding the steps involved in buying a house can make it easier to plan your purchase, right from budgeting to getting the right home loan and finally moving into your new home. Here’s a handy checklist that broadly outlines the steps in your home-buying journey.
1. Prepare your finances
The first thing you need to know as a home buyer is how much money you can borrow. Your borrowing capacity, or how much you can borrow to purchase a house, depends on several factors, including your income, assets, and expenses. A lender will also consider the size of your deposit and typically require you to pay at least 20% of the property price upfront. Some lenders, however, might allow you to borrow a higher percentage of the purchase price if you pay for Lenders Mortgage Insurance (LMI).
Irrespective of how much a lender will lend to you, it’s important to set your own budget to ensure you don’t stretch yourself out too thin on your first mortgage. Consider using a home loan repayment calculator to determine the approximate size of monthly repayments on various loan sizes before you set your budget.
2. Don’t forget the additional expenses
Apart from your deposit, you’ll also need to save some money for additional costs, such as:
- Stamp duty
- Conveyancing and legal fees
- Pest and building inspections
- LMI, if you’re taking out a low deposit home loan
- Loan application fees
- Insurance
You’ll generally need to save an amount equal to 5% of the property’s purchase price to broadly cover these additional costs on top of your deposit.
3. Collect the necessary documents for a home loan
If you’ve decided to apply for a home loan, you should start collecting the necessary documents you’ll need to support your application. While the information required might differ between lenders, you’ll generally need the following documents when applying for a home loan.
Documents to prove your identity
You can provide a copy of one of the following primary identification documents:
- Passport
- Current driver license
- Proof of age card
If you can’t present any of the primary identification documents, you may need to provide at least two of the following secondary documents:
- Australian birth certificate
- Australian Defence Force identity card
- Australian educational certificate
- Utility account
- Medicare card
Documents required to prove your income
If you’re a salaried employee, you’ll likely need to provide the following documents for income verification:
- Last three months’ payslips
- Previous few months’ bank statements
- A letter from your employer confirming your employment details
If you’re self-employed, you’ll need some or all of the following documents for income verification:
- Your Australian Business Number (ABN) and GST Registration
- Personal and business tax returns for at least two years
- Business financial statements
- A letter from your accountant and Australian Taxation Office (ATO) assessments if you’ve been in business for less than two years
If you earn rental income, you’ll need to provide a copy of the lease agreement or a letter from your property manager to verify your income.
Assets and liabilities
A lender would want to better understand your financial situation to assess your repayment capacity. Besides identity and income proofs, you may be required to provide the following:
- Bank account details and proof of your savings
- Details of any term deposits
- Share investment statements
- Details of any existing loans
- Details of any property or vehicles you own
4. Apply for mortgage pre-approval
Once you’ve reviewed your finances and set a budget, it could be a good idea to learn about different types of home loans and home loan features. This can help you decide on the right kind of home loan for your situation. You should also check the interest rates offered by various lenders and the fees and benefits to compare and find the right deal for you. Once you’ve shortlisted the best offers, you can consider applying for a mortgage pre-approval. However, remember not to apply to multiple lenders, as it could adversely impact your credit score.
When you apply to multiple lenders, a series of credit checks could be recorded on your credit file in a short duration, making you appear credit hungry and potentially hurting your credit score. That’s why it’s advisable to compare home loans and apply with a lender offering the best possible deal for your situation. It’s also good to check your credit score before applying for a home loan, as a poor credit score could lead your mortgage application to get rejected.
It’s worth noting that pre-approval is not a mandatory step in getting a home loan. However, it can take you closer to getting approved for one. Most lenders review your financial situation before pre-approving you for a loan. It means they’ll only pre-approve you if you match their eligibility criteria for a loan. Thus, you’re more likely to get the final approval unless your financial situation changes for the worse or the property you choose doesn’t match the lender’s criteria.
5. Find a house in a suitable area
Once you’ve decided on a budget, it’s time to find a suitable house for you and your family. You can attend auctions in your shortlisted areas to buy a home or contact a real estate agent to purchase through a private sale.
An auction could provide you with an opportunity to grab a house at a great price but expect to pay the deposit immediately on placing the winning bid. There’s also no cooling-off period when you buy at an auction, and it’s worth getting a house inspected before bidding on it to avoid purchasing something that’s not as great as it might look. On the other hand, a private treaty sale generally includes a cooling-off clause that allows you to walk out of the arrangement within a certain number of days. This gives you a few days to complete building and pest inspections and cancel the sale if you find the property has issues, or for any other reason.
6. Finalise your home loan
You’ve found your dream home, all the inspections are done, and the seller has accepted your offer. It’s now time to inform the lender and apply to finalise your home loan.
7. Settlement Day
The settlement day falls at the end of the settlement period, which is mentioned in your sale contract. It is the day when your lender pays the property’s remaining purchase price to the seller, and the property’s title is transferred into your name. Now, you must pay the relevant stamp duty charges to your state government to register the property’s title.
Congratulations. You are ready to move into your first home, but don’t forget to buy home and contents insurance to safeguard your house and its contents against damage or theft. You should also remember to notify your local post office, employer, credit card provider, insurer, and other utility providers about your change of residence to avoid missing out on any bills or other important communication.
These seven points broadly outline the steps you must take to buy your first home in Australia. While the process seems straightforward, you could possibly be confused about how much you can borrow or the right home loan type for you. Consider speaking to a mortgage broker to learn more about home loans or if you need help finding the right home loan product for yourself.
A mortgage broker is a financial expert who is required by law to act in your interest by giving you independent and impartial advice about home loans. The best part is that most home loan brokers don’t charge you anything for their service, and you can go to them for obligation-free advice to make your home loan journey simpler.
