A pre-approval for your mortgage can be extremely useful to have in place before taking the next step in making a home purchase or refinancing a property. Among other things, it can offer you peace of mind, especially if you are taking part in an auction where there is no ‘cooling off’ period.
What is a pre-approval?
A pre-approval is a conditional finance approval prior to you purchasing / refinancing a property.
Often also called ‘conditional approval’ or ‘approval-in-principle,’ you need to be aware that it is not a formal offer of finance. It is an indication that the lender will support your loan application provided you meet additional specified conditions.
A pre-approval assessment will vary between lenders but is usually based upon an initial assessment of your income and assets position, a credit history check and confirmation that you meet the lenders’ credit policy. Your application will need to illustrate your ability to service the proposed loan and include relevant supporting documentation as well as proof of ID.
The depth to which lenders investigate your circumstances for a pre-approval varies too. Some will be more detailed than others in their background checks. Asking your Mortgage Broker to arrange a fully assessed pre-approval will help avoid any unexpected surprises.
How long is a pre-approval valid for?
Sometimes it takes a long time to find the right property. Luckily a pre-approval can be valid for 3-6 months, so you don’t need to rush out and buy right away.
Even if your pre-approval lapses before you find a property, your Mortgage Broker can help you gain an extension without going through the whole application process all over again.
How much should I borrow?
Once you work through how much you want to spend and the required borrowing amount, you’ll need to know up to how much the bank is prepared to lend.
Your Mortgage Broker will help you determine what you can afford to borrow, find a suitable loan and take care of the application process for you. Usually, since the purchase price of the property is not yet known, the pre-approval application will be for a loan amount at the higher end of your budget. This will allow you room to move when negotiating your purchase price and prevent the need to apply for an increase application. It is much easier to reduce a loan application than to increase one, and you are definitely not required to borrow the whole amount you are pre-approved for.
Buying at auction
If you buy at auction there is no cooling off period, so having your loan pre-approved reduces the risk of losing your deposit due to declined finance. That said, it is possible to negotiate a finance clause or cooling off period into a contract even if the property is being sold at auction. This needs to be discussed with your Estate Agent before auction day and approved by the vendor.
Being able to show a written pre-approval to an Estate Agent will help show your commitment to buy, and in the vendors’ eyes may set you ahead of other purchasers who have not yet begun sorting their finance.
Focus on the right property for you
A pre-approval means most of the hard work in regards to your finance is done before you even sign a Contract of Sale. Getting your paperwork in order will allow you more time to focus on finding the right property. Then once you do buy your property it will be a much faster turn-around time for a formal approval.
Your Credit File
If you seek pre-approval with several different lenders, you will end up with several enquiries on your personal credit file. This often won’t be an issue if no finance is actually taken, but it will raise queries when you seek credit in the future, plus it could cause delays in the formal application process.
Know when your pre-approval expires and ensure you apply for an extension before it lapses. An experienced Mortgage Broker can advise you on this.
When to apply
You should apply before you begin looking at properties or when you think you’re ready to put an offer in to buy.
You will need to allow enough time for the lender to assess the application, do a credit check and submit for Lenders’ Mortgage Insurance (LMI) approval if required.
Delays can occur with different lenders so it’s best to be prepared, organised and get in early!
Where to from here?
At Financial Scope Melbourne, we can provide advice at every step in the loan process from pre-approval right through to settlement.
We also provide “Mortgage Makeovers” which can help you reduce your repayments, unlock the equity in your home, or consolidate debt.
If you’re in the market for a home or investment property and would like to know more about securing your home loan pre-approval, speak to Financial Scope Melbourne today.
Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.
Clint Thomasson
Clint has over 14 years experience in Financial Services working with major corporates including NAB, AMP, ANZ, and AXA. With a passion for Mortgage Broking, coupled with his outstanding interpersonal skills, Clint’s drive is all about matching your needs with the right financial solution. Whilst many businesses offer Finance Broking services, the difference you’ll find with Clint is his ability to listen, engage, retain knowledge and accurately match your requirements. Not only that, but he’s also a very friendly and genuine person with a great work ethic – you’ll have full confidence that he will deliver in a timely and highly efficient manner, every time.
