As a settlement agent Perth locals can rely on, we regularly answer questions about finance pre-approval and how crucial it is when buying a property. Finance pre-approval can provide home buyers with a competitive advantage in the property market. Read on below for more information.
What is Finance Pre-Approval?
In a nutshell, it’s a written commitment from a mortgage broker or lending institution stating that a lender will provide you with a home loan. The letter may also state the amount a lending institution is prepared to loan you, in the event that you meet certain conditions.
Finance pre-approval is also known as conditional approval, which demonstrates that your application fits the lending institution’s guidelines, but is still subject to conditions.
Keep in mind, though, finance pre-approval isn’t a guarantee that you’ll be granted a loan. It’s an offer that is subject to terms and conditions set by the lender, including:
- A satisfactory valuation confirming your loan will remain within the loan-to-valuation (LVR) set by the lender
- Confirmation that your employment hasn’t changed
- Confirmation that your financial position hasn’t changed
- Your agreement to the lender’s terms and conditions
How do I obtain Finance Pre-Approval?
By applying for a mortgage through a broker or financial institution of your choice. Your application will need to be accompanied by all the required documents, such as pay slips, bank statements and any supplementary information needed by your lender.
You can expect the process to take 2 weeks, sometimes up to a month, depending on the complexity of your application.
What are the Different Types of Finance Pre-approvals?
You can obtain a system generated approval via a lender’s website by providing basic information and documentation. Each lending institution has their own algorithm that will export its pre-approval findings. However, system-generated approvals are not checked over by a human, and will still be subject to conditions.
As a settlement agent Perth locals trust, Mosaic Settlements recommends that you should never make an offer on a property based on system-generated pre-approval.
A lending institution’s credit team will assess and verify all information and documentation provided by you as part of the application process. Credit checks will also be carried out by a third-party agency.
Assessed pre-approvals are still subject to your financial circumstances remaining steady and unchanged between the dates of pre-approval and final application. Pre-approval will also be subject to valuation of the property you want to buy, along with any other properties you’re offering as collateral.
Given all the manual checks and balances, pre-approval takes longer to achieve.
Why is Pre-Approval Important?
- It improves the chances of your offer being accepted by a seller
- It also provides a price for you to work with before you commence your house-hunt, or bid on a property at auction
- Reduces the chance of finance falling through
However, there are risks with pre-approval and reasons for it to be withdrawn, read on for more guidance.
What are the Risks of Finance Pre-Approval
- They usually come with an expiry date of 90 days. If you don’t purchase a property and finalise your application before the expiry date, the commitment made by the lender is no longer in force.
- Pre-approval is not a complete guarantee.
- Pre-approval is noted on your credit history. Reapplying too often without proceeding to final application can result in a negative credit rating. Only seek pre-approval if you’re serious about taking out a mortgage.
- Pre-approval is not tied to the value of a property. Be sure to make an offer of an amount that’s based on your research of similar property values.
When can Pre-Approval be Withdrawn?
- Change of your employment situation, including a reduction in your salary
- Change of your employment status from full-time to part-time
- Increasing your debt such as applying for a new credit card or personal loan
- When you’re unable to provide the required deposit or equity – missing a lender’s LVR target
- If lender’s mortgage insurance (LMI) is required due to LVR and you don’t meet the requirements
- You default on a loan payment (even in the case of an accidental oversight)
- You can’t provide the required pay slips and proof of savings as you outlined in your application
- Interest rates increase and affordability is stretched
- The property you’re buying was valued at less than the amount the seller wants
- The property falls outside of a lender’s security criteria – there are many contributing factors, each lending institution’s are different
Our Advice: What to do before seeking Finance Pre-Approval
- Choose a good broker who can break down the jargon and help you feel empowered.
- Find out if you qualify for a home loan and the amount you’re entitled to borrow.
- Decide on the type of home loan you want. You may need a construction loan if building a new home. Look into fixed and variable home loans and don’t just opt for the cheapest rate – be sure to check fees.
- Research properties to establish if your budget, tastes, needs and wants will allow you to buy what you want.
- Talk to real estate agents, visit home opens, even attend auctions in order to get an understanding and feel of the current property market.
You’ll also need a Settlement Agent, that’s where we can help!
Mosaic are a settlement agent Perth locals can turn to for a trusting relationship and first-class conveyancing services. Reach out to our expert team today to assist with finalising your real estate transaction.