24 April 2014 A quick guide to home loan pre-approval

When looking for a mortgage pre-approval, it isn't easy. There are many ways to go about it, and the last thing you would want is for the loan to fall through last minute - particularly if you're looking at buying at auction.

At the end of last year, an increasing number of people were being reported as taking out pre-approvals and using it as a leg-up over competition.

However, Property Observer knows of a number of cases where buyers, confident that they can achieve a certain loan, head in and find their finance fallen through. Don't let this happen to you.

First up, a recommendation is to always look to get formal approval, rather than pre-approval, for auction. Pre-approval is generally most useful when you can offer a conditional contract on the basis of a valuation, inspections and similar.

WHAT IS PRE-APPROVAL?

Think of pre-approval like reserving yourself a seat at a restaurant. You know you're going to want one, but you're not quite there yet. If you book, and provide plenty of information in advance, then you're likely to secure yourself a seat. If, however, you book for three people rather than five, or for the wrong time, you're going to find yourself without your venue of choice. Similarly, you may get there and find that there hasn't been a seat reserved for you after all or that your own circumstances have changed.

Pre-approvals for mortgages work in a similar way. You can head in to a lender, and fill in information, and then you will be provided a suggestion of your borrowing limit with conditions. You may later find that the pre-approval didn't have as much information as it needed to be accurate or that the property you're looking at doesn't stack up.

WHY GET PRE-APPROVAL?

Having pre-approval will enable you to know what you should bid up to at auction, what you can afford and where your limits are. It will also give you a boost of confidence when negotiating a property.

Michelle Hutchison, money expert for Finder.com.au, explained to Property Observer that readers should look to get this done as early in the buying process as possible as it can help speed it up.

"I've seen people who have missed out on buying the home of their dreams because they couldn't make an offer in time as they didn't have pre-approval. Real estate agents will also take you more seriously because having pre-approval means you are essentially ready to buy," said Hutchison.

Century 21 Homes Loans WA, Harry Bozin, said that it can be powerful for pushing a vendor in the right direction.

"In addition to enabling an investor to narrow the property search within a purchase budget, loan pre-approval could also provide increased price bargaining power with vendors, who might be willing to accept a lower price than was advertised with the knowledge that the transaction is already backed by secure finance – particularly in cases where a vendor is looking for a quick and hassle-free sale," he explained.

However, not all of them are the same.

DIFFERENT PRE-APPROVAL VERSIONS

Mortgage Choice head of corporate affairs Jessica Darnbrough told Property Observer that home loan pre-approvals are definitely worth considering.

"As a general rule of thumb, pre-approvals are valid for at least three months," she explained, although some vary. Commonwealth Bank's pre-approvals, for instance, are noted online to be valid for six months. After this time, you repeat the process and get another pre-approval.

"Some lenders only require potential borrowers to complete a short form in order to gain pre-approval, while others require a significant amount of information and documentation to provide a formal written pre-approval," said Darnbrough.

"To be sure of your borrowing capacity, a potential buyer should secure a formal pre-approval."

A formal pre-approval means more than just getting it done online. A five minute questionnaire and no follow up before being given an indication should not set your mind at east. Savvy borrowers will want to make sure that the pre-approval is a true indication of what they can purchase.

Hutchison explains that some will provide pre-approval within a 48 hour turnaround, while others can take longer. You will need to be ready in advance, especially if there is an enticing auction coming up.

"Borrowers can slow down the process if they don't have all of their paperwork in order, which means the lender will go back and fourth with the applicant to complete the application," she explains.

PAPERWORK YOU NEED

Pretend you're going for the final mortgage discussion, and replicate the paperwork you will need at that point. The more you can provide, the less back-and-forth there will be and the more comprehensive and accurate your pre-approval will be.

Bring

  • Copies of your bank statements
  • Savings history for the past three to six months (minimum)
  • 100 points of ID
  • Any proof of assets (eg council rates for any property you own)
  • Employment verification and payslips
  • Tax returns (particularly if self-employed)
  • Other proof of income (such as rental income proof through a lease document.

With these details, and some general information around whether you're buying new or looking to build, the lender will then look to verify the information. They will undertake a credit check and they'll also look to ensure there's nothing that could change your situation, such as reduced hours.

HOW USEFUL IS PRE-APPROVAL?

It can be a powerful tool to have, and if you have time it's worth getting pre-approval done, however you still would not necessarily want to enter into an unconditional contract. A valuation on the property you are looking at, as well as the final say-so in regards to achieving finance will likely both be needed. This can mean that, despite having the pre-approval, you may still not be able to purchase the property.

Pre-approval can also help bring up any problems you hadn't prepared for. Perhaps you can't borrow as much as you had been hoping due to a bad mark on your credit file you hadn't prepared for. Either way, this can quickly alert you before you get yourself stuck into a contract.

Similarly, there can be problems with looking for obtaining pre-approval multiples times, warns Hutchison.

"Obtaining pre-approval is part of the application process, which means it will be recorded on your credit file every time you apply. This can have a negative impact on your credit file if you apply for too many home loans in a short period of time," she said.

Lastly, don't expect to get the same pre-approval from each bank or six months later.

"In regards to experienced investors: many often believe that because they have gained finance approval in the past that they will automatically be granted the same in the future. It is important to note, however, that this assumption is incorrect, as the lending criteria of banks changes constantly, meaning that investors can cease to qualify for loans despite their situations remaining unchanged," said Bozin.

Reproduced in full with permission: Property Observer April 2014.

Attention: This article is intended to provide general information only. Every attempt has been made to ensure the accuracy of this information at the date of publication. The opinions expressed in this article do not reflect those of DHA, its staff or agents. Property prices are subject to fluctuation. Prospective investors should seek independent advice. DHA will not be liable for any loss, damage, cost or expenses incurred or arising by reason of any person relying on information in this article.

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