A home loan pre-approval provides you a leg-up on other buyers when shopping around for your new home or investment property. It enables you to buy with confidence knowing your finance has been pre-approved.
Having said that, it is also important you understand the conditions that come with pre-approvals. There are instances where being pre-qualified is good enough however it is not the same as a pre-approval.
Let me explain…
Getting pre-qualified for a loan gives you an idea of how much you might qualify to borrow. You have not actually applied for a loan and your mortgage lender has only your word in relation to your income, your assets, and your liabilities. None of your information has been verified (by the bank) and therefore the loan amount is in no way guaranteed.
Getting pre-approved means that not only have you given the mortgage lender information on your income, assets, and liabilities, but your information has been checked and verified. In some cases the lender has also pulled out your credit report to learn about your credit history and credit-worthiness.
Once you have been pre-approved, you need to know the maximum purchase price you can bid up to as the pre-approved amount is merely the maximum loan amount you qualify for based on your borrowing capacity, however the usual LVR limitations still apply.
For example, if you’ve been pre-approved for $1m (based on your borrowing capacity) but you end up buying a property for $750k, the maximum loan possible is $675k (plus LMI) based on a 90% LVR loan. In some instances you may be able to obtain a 95% LVR loan, however the point is that you cannot borrow 100% of the purchase price plus costs just because you have a $1m pre-approval.
A word of caution…
A pre-approval is still subject to various conditions, such as satisfactory property and satisfactory valuation to the bank. Being pre-approved carries more weight than a pre-qualification as it is based on verified information. A pre-approval enables you to jump on opportunities as they present themselves and once you make the actual purchase, getting formal approval is a much quicker process.
It is important to note that you are not guaranteed to get a mortgage if you are pre-approved or pre-qualified. For example, if your circumstances change during the pre-approval period, such as loss of job, then this may be a show stopper!
Your best chance to minimise risk is to talk to your trusted Mortgage Advisor, as policies vary significantly between banks and lenders. Your Mortgage Advisor can accurately work out your borrowing capacity and borrowing options, as well as address all issues before you bid at auction to ensure you minimise your risk as much as possible.
Advantages of home loan pre-approval:
- You’ll know exactly how much you can spend
- You know what your repayments will be
- Your final loan will be organised faster
- There’s usually no cost charged by the bank
There are different kinds of pre-approval so it’s important you get a formal, written pre-approval. Once you have it, you can negotiate or bid under almost the same conditions as a cash contract.
Be wary of any website that offers you a pre-approved home loan without taking the time to assess your financial situation. A reputable Mortgage Broker will organise your home loan pre-approval for a loan that matches your personal situation and financial goals.
Disclaimer: This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and seek specialist advice from a qualified and licensed advisor.