Getting a Pre-approval and What to Watch Out For
Ready to buy a property? You’ll need to show the seller you have enough money. For most people, this will mean getting a loan, and the first step to getting one is obtaining pre-approval for it.
Pre-approval – also known as conditional approval or approval in principle – is an indication from a lender as to how much you can borrow. If you have pre-approval, vendors and agents know you’re serious about buying. This can help in negotiations and your own confidence that you are half way there to buying your home.
Here are the four steps to a pre-approval followed by what to watch out for once you have it:
1. Gather your financial information
To get an idea of how much you can borrow, and therefore what you can afford to buy, you need to give the lender a comprehensive picture of your finances. This includes your income and assets, and your financial obligations such as existing debts and living expenses (including ongoing bills, entertainment, food and car expenses, etc).
You’ll need evidence of everything:
Pay slips and tax returns for your income.
Company financials if you are a company director.
Loan statements for existing loans.
Credit card statements
Statements or proof showing other forms of income you are receiving ie rental statements, dividend statements, etc
You can use all of this information to get an idea of how much you may be able to borrow.
2. Meet a lender or broker
Make an appointment to speak to a lender or mortgage broker. Most will provide a list of what you need to bring with you, such as the evidence explained above and the required forms of ID.
At the appointment, the lender or broker will use your information to calculate an approximate borrowing figure. If you want to proceed, you can fill in a pre-approval application form.
3. Undergo a credit check
The lender will arrange for an independent credit bureau to perform a credit check on you. This may affect whether or not you can borrow money, and how much.
4. Receive your pre-approval
Assuming your credit rating allows you to borrow, you’ll then receive a conditional approval certificate from the lender. The certificate is usually valid for 90 days. This is an indication, not a guarantee, of the amount you can borrow.
Use this figure to work out how much you can spend on a property, taking into account the size of your deposit. Factor in expenses such as conveyancing fees, stamp duty and so on. Also consider that you may not be able to borrow as much as the conditional approval certificate indicates.
Securing pre-approval will allow you to househunt with confidence.
What happens next
Once you’ve put in an offer on a house – whether at auction or a private sale – you’ll need to get full approval on a loan. Contact your lender or mortgage broker with details of the property, and they’ll work through the remaining part of the home loan application process with you.
What to watch out for
While obtaining a pre-approval is an important part of the home buying process, it does not mean that you are over the line just yet. Here are a few points to keep in mind:
*Type of property/security
Each lender can have different policies on what types of properties they find to be acceptable in their view. Studios, high rise apartments, serviced apartments, size, location, number of levels, all of these can factor into whether the lender would fully approve your home loan application.
How much you decide to pay for the property does not necessarily mean the lender agrees with your purchase price. When the property is valued, it may come in lower than what you agree with the seller/agent. This can cause issues as it can increase the deposit amount required, or result in you needing to pay LMI unexpectedly. In worse case scenarios, you could end up not being able to finalise the purchase if you are not able to come up with the additional funds due to a lower than expected valuation.
While you may have thought the credit check portion was completed earlier, if there has been some time elapsed since the pre-approval was provided there could be another request for your latest payslips. If your employment situation has changed since that time, it can then impact the pre-approval and require another round of reviews.
How we can help
We provide a free property report service for any place that you are interested in. At the same time, we can have a look over the property to provide another opinion of whether there could be any potential issues before you place through an offer. While we do not approve the home loans and cannot know for certain how the lenders will view the property, we can definitely increase the chances of it being approved by going through the lenders policies to give you the best percentage. Contact us to chat anytime about property, we are always happy to talk.