Purchasing your first home requires one to prepare mentally and financially, because this decision can be extremely overwhelming. In my previous article “ Things to consider when buying your first home”, I referred to two important aspects one needs to be mindful of when making this buying decision.
For most people, the home loan application process tends to be tedious, lengthy and often requires a lot of paperwork. Your banker will most probably ask you to submit heaps of documents that can take time and effort to compile, and this can be disheartening!
In this article, I share four documents that are important when preparing to make the buying decision and hopefully help ease the “burden” that comes with the home loan application process.
1Personal Documents
As mentioned above, for a financial services provider (FSP) to consider your application you will need to submit a number of documents. The first step is to compile your personal documents such as your identification documents (ID), marital status declaration, most recent pay slip and statement of income and expenditure. These documents are used by FSPs to compile a customer profile before it can make a lending decision for example a certified copy of your recent ID with your correct names i.e. national ID or passport.
A home loan is a contractual agreement, therefore IDs help FSPs know WHO they are contracting with. Secondly, submission of a marital status declaration (MSD) is important e.g. single, married in community of property (COP) or married out of community. MSD is an important requirement because your marital regime influences the lending decision.
If you are married in community of property for example, you will need spousal consent before your home loan application can be considered. Planning with your spouse thus becomes key when considering buying your first home. Other documents that are important for your home application are your pay slip and statement of income and expenditure. These documents play an important role when assessing affordability.
The FSP will assess whether you can afford the monthly instalment and conduct a stress test assessment to determine if you will still afford the instalment in cases of interest rate fluctuations. If married in community of property for example, your application can also be considered on the joint estate i.e. the household income and expenditure. This can help improve affordability if both spouses are in good financial standing.
2The Property sale agreement
Whether buying your first home from an accredited contractor or from someone who decides to sell you their home, the sale agreement (commonly known as the offer to purchase) is an important document in the home loan application process.
An offer to purchase is an agreement between a buyer and seller stipulating the terms and conditions of the sale. This includes the purchase price, description of the property i.e. plot number, physical address and details of both the buyer and seller. This agreement forms the foundation of the home loan application as it influences the lending decision i.e. how much credit is approved and other approval conditions such as upfront deposit etc. Both seller and buyer and witnesses must sign this agreement.
3Valuation report
Most FSPs will also require the submission of a valuation report from a reputable valuer. A valuation report helps FSPs determine and verify that the market value of the property is fair. As a first time buyer, you would want to be sure that you are making a wise buying decision, right?
Having a valuation report helps you verify that the property is valued at market rate. Please also take note that valuation reports come at a cost. When considering buying a house, make sure to prepare for this cost. I will however, elaborate more on such costs in my next article.
4Life Cover policy
Another important document that forms a critical part of your home loan application is a life cover policy. It is a pity many first time home buyers do not always understand why they need to provide a life cover policy.
A life cover policy is a policy that pays out a lump sum of money to your nominated beneficiaries in the event of your death. This policy is key for people who have dependents because it provides for them financially after your death. You would never want your children being evicted out of their home after you die, right? FSPs require a life cover policy for exactly this reason.
You will thus cede your rights to the FSP by signing cession forms. This means that the FSPs have rights to claim from the insurer. Should you die, the FSPs will claim against your nominated life assurance company. The life assurance company will settle any outstanding amount on the home loan and pay out the rest to your estate.
This way, your family can maintain the standard of living long after you are gone. It is important that the cover amount is higher than your home loan and you pay your monthly premiums without fail. The home loan application process doesn’t have to be burdensome. We can ease the process by preparing well ahead of time.
As promised, I will continue to share more articles that will help you better prepare for your home loan application and hopefully help you get that much needed approval.