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So you want to borrow money for a Home of your own?
You are going to need to show genuine savings ability, Have a deposit and have cleared the decks of existing debt to Qualify. Here how.
If you have used Money Buckets Budget planner to improve your Financial Situation, you may have already put yourself in a position to qualify for a Home Loan. A bank or Finance provider will be looking for more than just your income to be able to pay a loan. They will be looking for you to have had a history of savings and repayments to loans, in addition to your rent, that shows you can live with a home loan.
Owning and maintaining a home and paying the home loan, will initially take more out of your pay than just paying the rent. You will have rates to pay, repairs to make and you will probably want to individualise your home, simply because you can. In the long term, say in 10 to 15 years, your Home Loan repayments will probably become cheaper than renting and eventually when you own your own home, Financial Freedom is beckoning.
But lets get back to now. A home loan of $500,000, at 5% interest over 30 years, would cost you roughly $620 per week. But in reality you probably need to allow $670 to $720 a week to pay for the Rates, Insurance and Maintenance. Even more if Strata Fees are involved .
A Home Loan of $300,000, with the same conditions as above, would cost $372 per week, so once again you need to allow that $50 to $100 extra, so around $425 to $475 per week.
What the Lender is looking for is your ability to pay this higher amount on a sustained basis. And your ability to live on the amount that this leaves you.
So you are going to need to show that what rent you are paying now and what you have been saving adds up to this figure. This could also be shown with other regular debt or loan repayments.
Lets look at two examples
1: If you are paying say $350 a week rent now, you would need to be showing a sustained saving plan of $150 a week or $300 a Fortnight to show you can afford a $300,000 home loan. So you will have showed an ability to pay $500 per week on a regular basis. If you had been saving this amount for 3 to 4 years you would be in a good position to get a home loan. You would have a savings history and a savings account of around $30,000. That would be enough for a small deposit, stamp duty and legal fees.
2.: If you are paying $500 a week rent now and wish to borrow $500,000 you would need to show a saving history of say $220 per week, which shows an ability to pay $720 per week on a sustained basis. Done over 3 to 4 years, this would give you from $35,000 to $45,000 of savings to put towards deposits and legal fees.
If you have been paying Loans, Cards and Debts back, as well as savings, this will also add onto your proven ability to live with the Home Loan you are asking for. But these loans will generally have to have been paid off for you to qualify for a Home Loan. It is preferable to have no other Debt when applying for a home loan. Each extra loan you have reduces your borrowing capacity.
You need to demonstrate you can live on the Budget you are proposing for the Home Loan. If you have trouble living on that budget, its not going to get any easier with a home loan, so it's good practise.
Is there any short cuts?
If you have a partner, you can combine your resources and put yourself in this position quicker.
If there is a gift of money or inheritance that helps you along, you may only have to show a savings record of 6 to 12 months to get approved. Parents can sometimes help with the equity in their home, to put up against your home, but once again you will have to show at least a 6 to 12 month history of being able to save and show your ability to put away that amount of money.
If you need help planning this out, contact Money Buckets and talk to a consultant to get an overview of your situation.
Those who have addressed their Debt Problems, turned things around and started saving, will be in a good position to move into their own home at the completion of their Debt Agreement.
If you haven't been able to save while in your Debt Agreement, start planning to save once the Debt Agreement Payments stop. Once again a quick chat with a Money Buckets Consultant could put you on the right Track
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