Applying for your first home loan can be daunting.
Because of this, it is likely that you will ask for help. You may seek advice from family or friends. You'll probably do an Internet search or two. You may even attend a seminar for first homebuyers.
There's never been more information out there regarding home buying and home loans. Whichever path you take, you're likely to be inundated with hints, tips and words of wisdom.
Unfortunately, while there is a lot of great information available, there is also a lot of misinformation; especially surrounding who can and who cannot apply for a home loan.
In this article, we're going to look at some of the most common home finance myths, and the reasons why they're more fiction than fact.
1. 'My application was rejected. So, I can't get a home loan.'
This is a common one.
Being turned down for a home loan can be an anxiety-inducing experience, particularly if your lender isn't clear on why your application wasn't accepted.
You may be left feeling uncertain or defeated. Many first homebuyers, after being rejected, hold off applying again for some time.
The good news is, you're not alone.
You aren't the first person to have your first home loan application turned down and you won't be the last.
The even better news is that just because one lender said no, that doesn't mean that all of them will.
While it's important not to 'spam' lenders with numerous applications – see below – there may be a different lender and loan option more suited to your situation and circumstances. This lender may approve your home loan application, even if you've been denied elsewhere.
While it may be tempting to apply with as many lenders as possible, we strongly advise you not to do so. This is because all loan applications (whether they are accepted or not) are recorded on your credit history.
If you apply with a dozen lenders and they all turn you down, then that's a dozen rejections now recorded on your credit history. These multiple rejections could potentially deter lenders in future.
Find out more about how your credit history affects your loan potential.
2. 'I need a 20% deposit to get a home loan.'
A lot of people will tell you, you shouldn't apply for a home loan without a 20% deposit.
This can be good advice. If you have a 20% deposit, plus another 5% to cover stamp duty and bank costs, then you could save a significant sum by not having to pay Mortgage Lenders Insurance (MLI).
The reality is though, some of us may never be in a position to pay a 20% or 25% deposit.
That's why many lenders offer low-deposit home loans. Some lenders, in selected situations, will offer home loans with a deposit as small as 5%.
So, if you can't meet that magic 20%, don't despair, you may still have options.
"There's never been more information out there regarding home buying and home loans."
3. 'I can't get a mortgage because of bad credit.'
There's no getting around it. Bad credit can make getting a home loan difficult.
However, difficult doesn't mean that it is impossible.
While many lenders will run at the mention of bad credit, there are a number of other lenders who offer bad credit home loans.
You may just have to try harder to find those lenders who offer them and work out if they're suitable for you.
- All bad credit is the same
Not all bad credit is equal. A lender will consider a $100 bill default from five years ago differently to a $1000 car loan default from last year. The details of your credit history matter.
- Lenders automatically turn down bad credit applicants
It's true that some lenders will do so. However, there are lenders that specialise in bad credit loans, and they may consider your application differently.
- Bad credit home loan rates are not affordable
This will depend on your situation and budget. It's true that bad credit loan interest rates are higher, however depending on your income, they may be affordable.
Mortgage brokers have access to a large number of lenders and finance products. They can help you to seek out and compare a range of options to find finance that is suitable for you.
Additionally, a broker with experience in bad credit home loans could assist you in finding suitable finance, even if you have a complicated credit history.
Find our more in our first home buyers guide.
4. 'I'll be stuck with a bad credit rate for 30 years.'
As stated above, bad credit home loan rates are generally higher when compared to other types of loans.
However, your bad credit home loan doesn't have to be a long term solution.
Depending on your situation and credit history, you may be able to secure a bad credit home loan today and then refinance for a better rate in future.
To give yourself the best chance of refinancing success you should:
- Meet your home loan repayments for at least 12 months
- Demonstrate stability by meeting all financial obligations
- Minimise other debts, including credit card debts
- Pay bills on time while avoiding defaults completely
Ultimately, your lender will want you to show that your previous financial troubles are over and that you are now in a position to meet your financial commitments.
Prove this and you could potentially refinance for a better rate.
"While many lenders will run at the mention of bad credit, there are bad credit home loans available."
5. 'All loans are the same.'
This one is certainly not true.
Fixed rate home loans and variable rate home loans can be very different, both in terms of overall costs and the amount of benefits you receive.
For example, a fixed rate home loan will often be cheaper than the variable alternative. However, a variable home loan may offer more features such as the option to arrange mortgage offset accounts.
Different lenders often charge different rates. The fees they charge can also vary considerably.
So depending on the plans for your loan, you could end up paying more on refinancing or exit fees.
By taking the time to compare different loan options now, you could save yourself in the long term.
Think you can't get a home loan? Think again.
At Rapid Finance we've been helping Australians to find home finance since 2001. And, we may be able to help you too, even if you have a less-than-perfect credit history.
Our loan specialists can compare a range of loan options from a variety of lenders to find a home loan solution that matches your circumstances.
For more information, visit our home loans page.