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‘Be 100 per cent honest’: Secure a home loan by avoiding these red flags

Securing pre-approval can be stressful and there are no shortage of red flags to avoid.

Securing pre-approval can be stressful and there are no shortage of red flags to avoid. Photo: Getty

Australians are being urged to pay close attention to the details in their home loan and pre-approvals, with an expert revealing a new red flag to watch for when buying property.

Veronica Millman, a lead credit assessor at Tiimely Home, says many lenders are now handing out so-called pre-qualifications under the guise of a loan pre-approval, which can give buyers a false confidence and land them in trouble if they find their dream home.

With interest rates at decade highs and property prices rising, it has become more important than ever to get your financial house sorted before making a loan application, Millman said.

“Pre-qualification is just an indication of what you can borrow based on what you’ve told someone – there’s no verification or in-depth financial assessment,” Millman explained.

“It’s almost like doing a borrowing calculator on a website of a bank … you could end up buying a property you can’t really afford.”

Pre-qualification can be a convenient way to get an idea of what you might be able to borrow, but cannot replace traditional pre-approval that involves a financial assessment.

“A bank will look at what other debts you might have and how much you spend on your living costs each month,” Millman said of the pre-approval process.

“It’s much more in depth and it’s actually all validated.”

Winning pre-approval

Securing pre-approval from a lender is a vital step in purchasing property; it allows you to look for a home knowing what you can afford – making you more attractive to many sellers.

“Especially in today’s market where there is a lot of buyers vying for the same property, it just gives you a little bit of an edge,” Millman explained.

But the process for securing pre-approval can be stressful, particularly because if it involves opening up the doors on your financial life for a bank or other lender to rummage through.

Canstar Blue editor in chief Effie Zahos said putting your best foot forward is important, because ultimately your borrowing power reflects what banks think of your financial health.

Zahos said the process of buying a home should start months before you head out on a Saturday morning to start looking at properties.

“The first point of call is to detox your budget,” Zahos explained.

“Have a look at your bank statements and if you’re seeing transactions going out left, right and centre these are going to be red flags for your lender.”

Honesty is the best policy

Millman said being open with lenders about your financial situation is vital when making a home loan application, because they will likely see it all anyway in your bank accounts.

“Be 100 per cent honest about what you’re spending on living costs and make sure you take into account what future living costs you might have when you move into a new property,” Millman said.

“Lenders will look at whether people can actually repay the money and whether they’ve been able to save their loan repayments and been able to live without that money.”

Hidden costs

Zahos said that home buyers should also be on the look out for hidden costs, such as strata fees if you plan to purchase a unit.

Those extra fees could sink your loan because lenders will look at what your costs are going to be in the new home during assessment.

“The more watertight and the more prepared you are, the more negotiating power you have with real estate agents,” Zahos said.

“The ones that are prepared are the ones they will push through.”

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