If you plan to buy a home soon and are fortunate enough to still be employed, you’re likely to find the market is prime for a good offer. The sad fact is that, with so many people being made redundant, a lot of buyers have been removed from the market, at least temporarily.
But before you start filling your weekends with open homes, you need to know what you can afford and that means getting a pre-approval from a bank. With a pre-approval, or Letter of Offer, in hand you can move quickly on any property that you fall in love with.
As you would imagine, there are a few documents that you will need to give to the bank. Here’s a checklist that will apply to most people:
- Identification, such as a passport or driver license, and proof of your residential address;
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- Three of your most recent payslips or, if you are self-employed, your most recent financial statements;
- A letter from your employer stating how your employment has been affected by Covid-19 and if employment is expected to continue; and
- Three months of bank statements from your spending account and, if you already have a mortgage, six months of bank statements from your mortgage account.
If you are approaching your current bank, you don’t technically need your bank statements (they can see them on their system after all) but it is worth having them on hand in case you don’t meet your current bank’s lending criteria and need to go to another bank.
It is also very good to know what is contained in those statements. Banks are currently going through mortgage applicant’s spending habits with a fine-tooth comb. Approaching the bank with your expenses categorised will tell the bank you are a person of good financial character.
There are some other documents that you may need, depending on your circumstance:
- Confirmation of your KiwiSaver balance (if you plan to use this as a deposit);
- Confirmation of your ability to withdraw your KiwiSaver and access to the First Home Grant;
- Confirmation of previous bonuses if you are relying on them to be able to afford your mortgage;
- A gifting certificate, if you are receiving help from your parents;
- A copy of your trust deed, if you are purchasing the property in a trust;
A blank copy of the sale and purchase, if you know the property you want to make an offer on; and
- A rental assessment, if you are purchasing an investment property.
Not everyone can get a pre-approval unfortunately. High-LVR borrowers - those with less than 20 percent deposit - will find some banks are still requiring you to have a “live deal”.
A live deal means you’ve had an offer accepted on a property with a finance condition. Make sure you have all the documents above ready if you are making a conditional offer on a property. There is limited time to process your mortgage and you may need to get a registered valuation before you can go unconditional.
If you aren’t quite ready to purchase yet, it is worth setting yourself up a “mock mortgage”. In other words, arrange your spending as though you were paying a mortgage already and, here’s the trick, pretend that mortgage is fixed at 7 percent - that’s what the banks are assessing your affordability at.
A $500,000 mortgage at 7 percent will be around $767 per week. If you’re currently paying $500 per week in rent, you would put another $267 into savings and make sure you don’t touch the savings. It’s hard for a bank to argue that you aren’t ready for a mortgage if you can show you’re already doing it.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
