Applying for a home loan involves asking a bank for a mortgage, or funds to help you to buy a property. There are a number of ways that a hopeful home buyer can approach this financial transaction.
In this article:
- What is a home loan?
- When do you apply for a home loan?
- How do you apply for a home loan?
- How hard is it to get approved for a home loan?
- What documents are needed when applying for a home loan?
- What happens after you apply for a home loan?
What does applying for a home loan mean?
What is a home loan?
When someone wants to buy property, they usually need extra finance from a bank. This makes up the difference between the buyer’s deposit, and the purchase price of the property. A home loan, also called a mortgage, is the financial agreement a bank or other lender may enter into with you that enables you to obtain the extra funds.
A home loan is typically for a set amount of money, which the borrower has to pay back to the lender over a fixed period (for example, 25 or 30 years). The bank charges the borrower interest, which is a percentage of the funds the borrower has to pay back in addition to the principal (the borrowed amount).
It also typically costs money to apply for a loan, in the form of upfront fees and, sometimes, insurance, if you only have a small deposit. It’s important to note that applying for a home loan is different to making an enquiry about a loan.
The formal mortgage approval process involves supplying your chosen lender with documents and receiving an official notification of either conditional or final approval (discussed in more detail, below).
When do you apply for a home loan?
There are a number of points during the home buying process when people typically apply for a home loan:
Before finding a home:
Some people choose to apply for a home loan before they have found a property to buy. This is called “conditional approval” or “pre-approval”. This defines the size of the mortgage early on in the home-buying process.
While pre-approval is not the same thing as formal approval, it’s still a useful first step for borrowers, as it can help them focus more closely on homes within their price range. This could, in turn, determine the type of house or apartment they choose to consider, as well as the location.
Preapproval is also necessary if you’re considering buying a home at an auction. It’s crucial to have finance sorted before bidding, as bids are usually unconditional and legally binding.
Typically, a bank will issue the pre-approved applicant with an official letter or statement. This sets out how much they can borrow, and the conditions of the pre-approval, such as how long they have before it expires.
After finding a home to buy
Some people choose to wait until they have found a property to buy before approaching a bank to ask for a loan, especially if they just stumble upon their dream home. In this case, it is possible to apply for a home loan after finding a property to purchase.
A real estate contract will typically include a “finance clause” (except for most properties bought via auctions). This clause allows the seller and buyer to negotiate an agreement about how long the buyer has to obtain a home loan, and for the bank to settle it (give an assurance that the funds are available for the purchase).
If the buyer is unable to find a lender that is willing to finance the purchase, the contract conditions would typically not be satisfied and the contract would be cancelled. The risks involved include the buyer losing any deposit paid to the seller upon entering into the contract.
When considering purchasing a property, it’s a good idea to obtain advice from a suitably qualified professional, such as a solicitor, before signing any contract.
How do you apply for a home loan?
There are two main ways to apply for a home loan:
- Directly to a bank – at a branch, online or via a comparison site such as Canstar
- Via a mortgage broker
However, before doing either, it’s a good idea to research what home loans are available on the market and what type of loan suits your circumstances. There are many factors to consider when selecting the right home loan, including:
- Interest rates – questions to ask include how much interest will the bank charge, whether the rate will change (variable rate) or be fixed for a period of time, and whether the rate is competitive with other rates on the market
- Features of the loan – considerations include whether the loan gives you the option of setting up an offset account or redraw facility, whether you can vary payments easily and whether the balance is accessible online
- Duration (term) of the loan – how long will it take to pay it off, and what happens if you decide to pay extra
How to approach a bank for a home loan
1. Start with your own bank: After researching the market to learn what’s on offer, contact banks you already use to ask them about their loans. Sometimes, lenders will offer special rates, deals or packages to existing customers.
It’s also a good idea to ask them about deals that they offer to new customers, to see how they stack up against what you’ve been offered.
Often, your bank’s online banking portal will have information about how to apply for a home loan. Typically, banks have special teams that deal with home loans. It could also be possible to apply online, or receive pre-approval online. If in doubt, try ringing your bank directly and asking for the home loans department.
2. Contact shortlist of banks: After researching the market via Canstar’s selector tool and making your shortlist, contact each lender you’re considering to find out about their application processes.
Some banks allow people to apply completely online. It could be a good idea to start by making an enquiry online first, so that you receive greater detail about the conditions of the loans you’re looking at, and what the application process involves. Then, compare each one.
Important to note: Each time you apply for a loan it’s recorded on your credit history. This could impact your credit score, which could have an impact on your ability to borrow money in the future.
Think carefully before making a formal application for a loan or for pre-approval. Enquiries – just asking a lender for information – are typically not recorded on a credit report. If in doubt, ask the lender.
How to use a mortgage broker to apply for a loan
Mortgage brokers are service providers that sit between lenders and borrowers. They can negotiate a loan on behalf of a borrower, and organise paperwork and other requirements.
There are a large number of companies and individuals operating in this space. Know that all financial service providers in New Zealand must be registered on the Financial Service Providers Register to provide financial services legally.
It’s important to note that mortgage brokers will not necessarily offer you the full range of home loans on the market. Some are bound to a certain set of lenders. Mortgage brokers earn their fees in a number of ways during the home loan process. It’s a good idea to find out what fees and charges apply, including any commissions or “trail fees” that a broker may earn from a lender it recommends to you.
Typically, a mortgage broker will talk to you about your needs and your financial circumstances, and help you determine which loan or loans best suit you. The broker then goes to the lenders (typically the ones “on their books”) and creates a list of options for you to consider.
Once you choose a loan, the broker generally handles the application process (although you will most likely have to complete a number of online forms and supply all necessary information). The broker will then typically also co-ordinate the financial settlement of your purchase.
How hard is it to get approved for a home loan?
This depends on many factors, including how much you need to borrow, your repayment capacity and the economic environment.
What documents are needed when applying for a home loan?
Canstar’s research into lenders’ application requirements found that different lenders require different documents. However, most lenders typically require some, or all, of the following:
Home loan document checklist
- Proof of identification – this includes different types of ID – usually separated into “primary” and “secondary” ID. Primary ID usually includes a photo, such as a driver’s licence, or a passport. Secondary ID typically includes documents such as a birth certificate or marriage certificate. Some lenders’ online identity verification systems also require you to take a photograph of yourself holding a specific form of ID. It could be a good idea to make sure you have:
- at least one form of photographic ID, and
- two or three secondary ID documents
- Proof of employment – this typically involves providing:
- most recent payslips
- and/or bank statements of the account that your wage is paid into
- and/or a letter from your employer (especially if you are a casual employee, have an irregular income or are paid for piecework)
- A lender could also ask to see tax returns (particularly if you are self-employed)
- Extra income and assets – this could include:
- bank statements
- share earnings reports,
- any other proof of how your extra income is earned
- a list of assets, which could include a car or house that you own outright. If you are a landlord, you may also be asked to provide a copy of any lease agreements you have in place
- Expenses – most lenders will also want to see what you spend, such as:
- your household bills
- what you pay in rent
- and to see your transaction account and credit card statements. If you’re applying for a loan with a bank you use for most of your financial matters (such as transaction and savings accounts), they could source this information from your banking history
- If you are renting, your lender may also ask for the contact details of your property manager or estate agent
- Debts – the lender will most likely do a credit check
- but will also require you to provide details of any loans you have already, such as car or personal loans.
- Details of what you want to buy or build – unless you’re applying for pre-approval, the bank will need details of what you intend to buy or build. This is so the lender can perform a bank valuation. This involves specialists looking at the property to see if the amount you are paying is acceptable.
- if purchasing, they need a copy of the signed contract of sale
- if building, they’ll need a copy of the construction contract and details of the land’s location and price
- Insurance – some lenders may also require that you send them details of
- any insurance policies you hold, such as life insurance or home and contents insurance
- Deposit or grant help – if you are getting help to pay your loan, the lender could also ask for details. This would include
- if you have, or plan to, apply for a grant
- if someone is giving you money to boost your deposit. For example, if a relative is gifting you funds for a deposit, a lender may require a letter from that relative detailing the conditions of that gift or loan, such as if you have to pay it back
- Conveyancer’s or solicitor’s details – the bank or broker will also need to know
- who is doing your conveyancing – the legal work involved when buying a property. It’s a good idea to talk to your conveyancer about what level of involvement you need to have in the process, such as if you need to chase the bank or broker to find out if you’ve been approved, or if they will do that for you
It’s a good idea to have access to a document scanner or a smartphone with a high-resolution camera, to allow you to send all the documents to your lender or broker via email, or their online application portals.
It may be necessary, in some circumstances, to have an official (such as a Justice of the Peace) witness your signature or document copies. Usually, a lender will require documents presented in PDF format and photos in JPG (but they will let you know during the application process). Bank, share and super statements can typically be downloaded in PDF format from the organisations’ online portals.
What happens after you apply for a home loan?
When you’ve completed all of the application requirements, typically your lender or broker will keep in contact with you about its progress. It’s a good idea to make sure that the bank is aware of any finance clause in your contract, and when it expires. Typically, your conveyancing solicitor will be able to help you navigate through this area.
If you are approved for the loan, the lender will typically issue you an official document (the home loan contract) that states the conditions of the loan. This is usually forwarded to the seller’s solicitor (usually by your solicitor), which means that the finance clause of the contract is met. The lender then has a set amount of time (as detailed in the contract) to settle the loan (or to provide the funds to the seller and activate your home loan). Seek professional advice.
If you are not approved for the home loan, there are a number of reasons why your bank may have rejected your home loan application. Your conveyancing solicitor will generally be able to give you advice about what happens to the contract of sale.
Canstar is here to help
When it comes to buying a house, as mentioned above it’s important be realistic about your budget and the true costs of home ownership. And that includes thoroughly researching the best mortgage deals in the market.
If you are in the process of saving for a first home, it pays to keep on top of current interest rates. And Canstar is here to help. Below is a snapshot of the current low deposit home loans on offer on the Canstar database, sorted by the maximum loan to value ratio of each loan (highest to lowest).
Please note that this table is generated based on a loan amount of $350,000 in Auckland for a first home buyer at a floating rate. If you’re interested in comparing further, just click on the button at the bottom of the page.
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