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First home buyers are wise to get pre-approval for a mortgage before they go shopping for a home. This will ensure you are aware of how much money you are in a position to borrow and are able to move swiftly should a suitable property come up.
First of all, you will need to contact your bank’s mortgage manager or alternatively your mortgage broker, if that is the route you’ve chosen.
Lenders have always been required to ensure their borrowers are in a position to afford repayments. They will look at your financial history and situation and credit history wanting to establish whether you meet the criteria for serviceability of a mortgage. This means they need to establish that you’ll have enough money after expenses to cover your regular loan repayments, even if interest rates rise somewhat.
Recent changes to the CCFA (Credit Contracts and Consumer Finance Act 2003) were enacted to further protect borrowers. They require lenders to apply more scrutiny than ever to borrower affordability when they apply for loans, scrutinising more detail and evidence around borrowers’ spending as well as their income. Therefore lenders will need to see thorough information from you in order to assess you application.
They will let you know what their specific requirements are, but the following is typical information you should expect to produce (in addition to your identification documentation such as birth certificates etc to validate your identity).
The lender will also run a credit check so it’s a good idea for you to know beforehand what your credit score is like, which you can access for free online in this country. A credit score is a number between 0 and 1,000 that indicates how credit-worthy you are, and how likely you are to pay your bills on time. Most credit scores are between 300 and 850. The higher the score, the better your credit rating is.
Pre-approval means a lender has officially confirmed in writing that, subject to certain conditions being met, you may be able to borrow a specified sum of money from them. Upon receiving your pre-approval you should check that you understand all the conditions.
These will be conditions such as you getting a valuation on the property you are thinking of buying, having a signed and dated sale and purchase agreement and confirmation you have taken out insurance on the property.
It will also be subject to the specific property you choose being suitable, including not having any issues with its title and an apartment being of a sufficient minimum size.
It is important to understand that getting a pre-approval from a lender is an indication from that your loan will be approved, not a rock-solid guarantee. If there is an issue with the property you want the bank may not be willing to offer you a mortgage for it. And if your circumstances change during the period your pre-approval is valid for, your application will need to be re-assessed. You may have lost your job or taken on considerably more debt elsewhere.
You should allow a reasonable amount of time for a mortgage broker or bank to process your pre-approval, especially given the extra scrutiny lenders must apply when considering mortgages. Ask your lender how long pre-approval is likely to take but know that it is advisable to organise your finance early, applying three weeks or more before you need the loan. When lenders are busy it may take a week or more for your application to get to the top of their ‘to-do list’ and then they may have queries or decide they need more information from you.
Pre-approval usually lasts for three months and can usually be renewed for another three months if you haven’t bought a property in that initial period of time.
However a lender may not choose to renew pre-approval, especially in situations where your circumstances have changed or there has been a major change in the financial landscape.
Banks will allow you to factor in the income from getting either one or two flatmates as part of the calculations for getting a mortgage.
But they will only allow this income to count for about $250 to $200 per week income even though you might be able to charge more rent in more expensive cities such as Auckland. This is because they need to be responsible lenders, and not judge your ability to service a mortgage on only the best-case scenario where you have a flatmate paying top dollar for the entire duration of your mortgage.
A vital outcome of the pre-approval process is finding out how much a bank or other lender is prepared to lend you. The amount of mortgage you estimate you could service and the amount they are comfortable with may be two quite different figures.
Lenders will ‘stress-test’ your mortgage amount, factoring in whether you will still be able to afford repayments with interest rate rises.
Most major banks have online mortgage calculators but these are only rough tools often estimating living expenses as the average living costs for a household of your size
