It is advisable to get a home loan pre approval before purchasing. But do you know exactly what it is?
Pre approvals can be called different things by different lenders from conditional approval, indicative approval or approval in principle but they all basically mean the same thing. Because there are conditions attached it is not a guarantee that your application will be approved, it is merely an indicator that your application fits the criteria.
This is where the lenders credit department do a full assessment including reviewing your documents and conducting a credit check.
They will ask any questions that they need clarifying from the credit report and other documents and then proceed to issue a pre approval subject to a satisfactory valuation of the property.
This type of pre approval will take a few days to be issued and is the most thorough, so can be more heavily relied on.
You can apply for a formal home loan pre approval online.
Potentially you may submit a full application and supporting documents but these do not go through the full assessment process.
The pre approval can be received quite quickly sometimes on the spot or within a few hours, but is often system generated and the finer details of the credit report and documents have not been gone through by a credit assessor.
This type of pre approval will have a lot more conditions and relies heavily on the details that you included in your application.
Despite the shortcomings, it is highly advisable that a pre approval is completed prior to making an offer on a property. It is the best indicator that your scenario will be acceptable by the lender and gives you confidence to go house hunting, make an offer or participate in an auction.
When you are applying for pre approval be sure to ask the lender which one of the above they do. This way you will know how much work has been done and how much you should rely on it.
Always be aware that there is an element of doubt until you have unconditional approval. This is why your legal adviser will want you to have a full approval prior to exchanging contracts or committing unconditionally to the purchase.
Formal pre approvals can affect your credit score
While it is beneficial to have a pre approval before you make an offer on a property, you need to be wary about how many pre approvals you apply for. As mentioned above, each time you submit a pre approval application, the lender will run a credit check. This will then leave an enquiry on your file. Multiple enquiries can impact your credit score negatively. So, it is advisable to only apply with the lender you intend to go with.
Did You Know?
Many lenders offer a pre qualification assessment to get an idea about how much you can borrow, without the lender doing a credit check. This is a great way to get an initial indication, then when you are ready, you can apply for a formal pre approval with the lender you want. Check out State Custodians online qualification here.
Pre approvals expire
For most lenders, pre approvals last 3 to 6 months. Lenders usually have an expiry date as a borrower’s financial situation and the property market can often change over a few months. When applying for a pre approval, speak with your lender about the expiry date and what will happen if you don’t find a property within that time.
If the property is unacceptable, you may not be approved
A pre approval does not include an assessment of whether the property is acceptable by the lender obviously because it hasn’t been found yet. This is why one of the conditions in the pre approval will be “subject to a satisfactory valuation”. Certain types of properties may not be acceptable to some lenders, like:
- Small apartments or particular apartment blocks
- Hobby farms
- Certain suburbs
- A property with large power lines close to it or
- A property that is in poor repair
When you are narrowing down properties, chat with your lender about what types of properties they do not accept.
If your circumstances change, you may not be approved
If your personal or financial situation changes after you have been pre approved, the lender will need to reassess your application. Worst case, it may mean that you are no longer able to afford the repayments. Some examples include:
Interest rate changes could affect your pre-approval
There is always a possibility that interest rates could change, especially if the RBA changes the cash rate at the monthly meeting. If the interest rate does increase, it means the maximum amount you are able to borrow may decrease.
Attention first home buyers
Some borrowers shop around for properties that they will need to borrow the maximum the lender will allow them to borrow. If interest rates increase, it could mean that you can no longer borrow that amount. It is worth looking at where interest rates are heading and also assessing whether you really need the maximum amount.
Sellers may prioritise you
If you have formal pre approval, you have already started the process towards getting a home loan. You will be in a good position to snap up a bargain quickly, proceed to full approval for your loan and exchange contracts before others in the market are able to. Real estate agents may also ask for a copy of your formal pre approval prior to accepting your offer, to ensure that you are a serious contender.
Most sellers will be keen to sell their property quickly, so if you are able to show them that you have a lender ready and waiting to proceed to full approval once you supply the contract of sale, it could give you a big advantage against other buyers.
If you are in the market to purchase a home or investment property and would like to know more about how a pre approval works, we can help. You can chat to our team on 13 72 62 or leave your details here and they will contact you.
Find out more about other home loan options and get tips on what to look for: