Debbie Shankar - 24 Jul, 2015

Home Loan Myths Busted

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When it comes to finding the right home loan and lender, many potential borrowers find it difficult to wade their way through the fiction to find the facts. This is because there are so many home loan myths in circulation. However, this doesn’t need to be the case if you know how to distinguish fiction from fact before you start any home loan research. Let’s look at the most common myths you’ll encounter so you’ll be well informed and armed with your own library of knowledge.

Lenders Mortgage Insurance (LMI)

MythLMI protects the borrower against loan default.

Fact – LMI is often confused with mortgage protection insurance, which protects the borrower should they not be able to pay their home loan. The truth, however, is that LMI comes into play when a borrower lends more than 80 percent of the value of a property, with LMI protecting the lender from any loss should the borrower not be able to make their home loan repayments.

Banks Preferences

MythBanks prefer to lend to couples rather than single people.

Fact – Many borrowers believe that they will find it difficult to obtain finance if they’re single. However, this is not the case. Lenders are more than happy to provide a single person with a home loan if they can afford to repay that loan.

Online Home Loan Rates

MythIf you want the best home loan deal then only look on the Internet.

Fact – Sure discounted rates can be found online, but often these are often generic and are not based on individual circumstances. Many lenders can offer borrowers with a strong credit history better than advertised rates. For instance, a couple who have an outstanding credit history and an existing home loan, who wish to buy an investment property, may be able to get a rate that is .50 of a percent lower than the advertised rate for both home loans that they will have.

Existing Lender Deals

MythMy existing lender can offer me the best deal on my home loan.

Fact – Your existing lender may be able to offer you a good deal, but this may not be the best deal available. So before you sign-up with your existing lender do your homework and research the market. Even consider discussing your options with a mortgage broker and gathering all of the facts. Then approach your lender armed with these facts and be prepared to negotiate.

No Home Loan Options for Bankrupts

MythIf you’re bankrupt then you won’t get home loan approval.

Fact – Having a poor credit history or being bankrupt will not automatically disqualify you from being able to obtain a home loan. There are lending options available for you, but you’ll need to be up-front with your lender and mortgage broker so that they can find you a suitable home loan.

Credit Cards and Borrowing Power

MythOnly the balance of my credit card will affect my borrowing power, not my credit limit.

Fact – The balance and the credit limit of any credit cards you have will reduce your borrowing power. Most lenders will recommend that you pay off your credit card and reduce its limit to $1,000 prior to applying for a home loan. This is because every $1,000 of your credit card limit reduces your borrowing power by $4,000. So if you have a limit of $8,000 on your credit card this may reduce your borrowing power by as much as $32,000. If you have more than one credit card, then your lender will also recommend that you reduce these to just one.

The Up-front Costs of a Home Loan

MythI only need enough money to cover the deposit when applying for a home loan.

Fact – A home loan deposit is just one of many financial considerations that you’ll need to make prior to buying a home. You’ll also need to allocate funds to pest and building inspections, loan establishment fees, stamp duty, mortgage title transfer fees, lenders mortgage insurance, conveyancing fees and moving expenses, as well as local council rates and utility fees.

The Lowest Home Loan Interest Rate

MythI should only consider home loans that have the lowest interest rate.

Fact – Low interest rates are just one part of the equation when searching for the best home loan. Before you take out a home loan you also need to consider home loan features, interest rate types, and your own personal and financial circumstances, as well as fees and charges.

Home Loan Approval and Assets

MythMy assets will allow me to buy a home, I don’t need an income as well.

Fact – In order to borrow money for a home loan you’ll need to be able to prove that you have a regular income so that you can repay the loan. Assets alone will not be enough for you to meet lending criteria and gain home loan approval.

Dependants and Borrowing Power

MythThe number of dependants I have will not reduce the amount I can borrow for a home.

Fact – Lender’s use a formula to calculate the financial costs associated with a dependent. They will then deduct this amount from your annual income. Therefore, the more dependants you have, the less residual income you’ll have to pay for a home loan. This, in turn, will reduce your borrowing power.

Want to know more about home loans? Then contact eChoice and find the right home loan for YOU today.

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