Buying a house? Here’s 6 tips to avoid being duped before settlement.
Updated: Dec 15, 2019
Buying a house is an incredibly important financial and emotional decision. Getting this right might be the most important financial decision of your life.
Here are some important factors to keep in mind when you are crunching the numbers. If you can tick off each of these points you will save yourself a tonne of sleepless nights and stress once the dust has settled and mortgage repayments have kicked in.
1. Strengthen your credit score
Your credit score is the gateway to either getting a mortgage or not. It will also play a role in determining the interest payments you will be required to make. Having higher interest rates due to lower credit scores means higher monthly payments and a higher overall payment.
If you don’t already know your credit score, you will need to have a look at where your credit score currently stands. The Credit Score ranges between 0-1200 for Australia.
If your credit score is less than 600, it is considered likely that you will have an adverse event (default, late payment, missed payment etc.) in the next 12 months. If your credit score is greater than 600, an adverse event is considered less likely.
The bottom line is, if you are in the top half you are considered creditworthy, and if you are in the bottom half, you aren’t.
2. Figure out what you can afford
Take a realistic look at your finances and your wages and work out what you can afford. Once you have determined the maximum value that you can afford, don’t even look at houses above that number.
I guarantee you that your real estate agent will try and push you past what you have budgeted for. Be insistent that you can’t afford houses above a certain price level. Because what happens when you buy an expensive house that you can’t afford? Life gets miserable.
You might have heard of people that win or inherit millions of dollars then go bankrupt. The reason for this is that even though they gain capital quickly, they don’t have the cash-flow (wages or income) to support large capital purchases. Expensive houses also have expensive ‘upkeep’ costs and a large mortgage is expensive to pay on a monthly basis.
In other words, you need to be able to have the income to support the loan. Do a quick budget check by subtracting your regular living costs and expenses from your income. That is the maximum you will have available for your mortgage. But remember, that is the maximum. Don't forget there will be additional expenses that you need to factor in - utility bills, taxes, perhaps buying new goods for the house. For renters, many lenders will use your history of rental as ‘proof of ability to pay’.
3. Save for a down payment, closing costs
It’s vital to save for your down payment. Make sure you can save enough money for a 20% deposit. This is not a small amount. If you need to borrow money from your family or parents, that’s fine. However, if you can’t afford 20%, this is a good sign that you shouldn’t buy the house or get into that mortgage.
By pulling together 20% you will have done two things:
1. Proven you can save money (this is very important to lenders).
2. Avoided Lenders Mortgage Insurance (LMI) which is dead money and expensive.
4. Build a healthy savings account
Building a healthy savings account proves that you have the capacity to save and the ability to budget. Trust me, two words that are music to a bank’s ears - savings capacity and budgeting ability. Lenders will take a long, hard look at this.
5. Get pre-approved for a mortgage
It’s great to get pre-approved for a mortgage. Nothing is better than being able to bid on a house if you already have the money. Real estate agents will trip over themselves to sell property to you.
Why? Mortgages are often sold to people who are part of what they call a ‘chain’. The ‘chain’ goes something like this: A couple, let’s call them the Smiths, want to buy their new property. However, this is entirely dependent on their ability to sell their house. In other words, the Smiths NEED to use the money from the sale of their house to buy their new property.
But guess what, the people that are buying their house are ALSO using the money from the sales of their own house, and so the chain continues. This chain can often be dependent on 20 sales or more to ensure that everyone gets paid.
Now, you might come along with a pre-approved mortgage and have NO dependence on any sales. As you are ‘ready to go’, this places you in an great position to bargain. As a reward, you will be able to use your bargaining position to get a pretty steep discount on the sale price.
In fact, people often use this technique for properties they know need to sell due to death or divorce etc. and get incredibly good deals.
6. Buy a house you like
This may sound silly, but you are spending a lot of money. You should damn well like the house you are buying. Actually, you should love it. Especially if it will be your home.
A house is an investment, yes. But, I like to think of a home as something different. Homes offer a sense of stability. They are a sense of belonging, a sense of community, and a sense of security.
Make sure you love the house and that it brings you and your family happiness. A great place to start is by making sure you get a mortgage that brings you ease instead of stress