Why is it important to get a pre-approval? When’s the right time to get a pre-approval?
Is it important to get a pre-approval? When is the right time to get pre-approved? These are two questions we get asked almost every day by first home buyers, and they are really valid because without a pre-approval its hard to know exactly how much the bank is going to lend you, what the actual amount of deposit you are going to need and also what your cashflow is going to look like after you’ve purchased your new home.
It is even more important to have a pre-approval in a competitive property market because so often we see first home buyers missing out on their perfect homes because they weren’t organised and in a position to put their best offer forward.
Or imagine if you were successful at a property at auction, they make you put down a 5% deposit on the day but then you apply for a home loan through your bank only to have it knocked back because of the type of property or your job status.
There is no way to get your deposit back at this point because there is no cooling off period when buying at auction in most states, so on a property worth $400,000 you could lose $20,000 for not having a pre-approval. Before you start shopping around for properties it is critical to get a pre-approval first, and although they aren’t 100% bulletproof they can give you confidence when putting offers on properties.
What exactly is a pre-approval?
A pre-approval is a preliminary loan approval from a bank letting you know what you qualify to borrow.
To get a pre-approval you just need to give your credit history to your broker or lender who then will verify your income and give you fairly clear guidelines on what you can afford to borrow.
In effect it’s like the lender is telling you that they will lend you X amount of money provided your income and personal circumstances don’t changed. This allows you to make stronger offers on property with shorter finance terms, meaning you can get a better deal and into the home of your dreams sooner!
When’s the right time to get a pre-approval?
Getting a pre-approval before you start checking out properties can help you narrow down your search and look for properties you can actually afford in the longer term.
There is a few reasons for that, firstly being a pre-approval gives you the ability to budget and work out your lending capacity – you get a full understanding of what your loan repayments are going to look like and understand the ongoing commitments without any mortgage shock once you find the right property.
Knowing your maximum budget means you won’t waste time chasing properties that are outside of your price range, getting your heart set on a property that you absolutely love but could be outside of your budget.
Ultimately a pre-approval will give you the confidence to start looking at properties, talking to real estate agents and negotiate knowing you can afford that particular property you’re interested in.
What are some common pre-approval mistakes?
As your personal or job situation might change over the year most lenders only provide pre-approvals that last between 3 to 6 months, so if you’re considering purchasing within the next three months it’s wise to get pre-approved.
The major mistake first home owners make is thinking a pre-approval is the same as a formal, or unconditional approval. As the bank is assessing your income and situation before finding the property, they only provide a pre-approval on a preliminary basis meaning it is subject to getting your updated income information, obtaining a valuation to make sure the property is suitable and updated credit file.
So although a pre-approval isn’t 100% bulletproof it still gives you an idea on what the bank is going to lend, subject to you finding the right property and some peace of mind when making offers on various properties. It helps you put much more competitive terms on contracts, for example instead of making your contract subject to 21 days for finance because you have a pre-approval and some of the work has already been done you might be able to reduce it to 7 days for finance to make your offer more competitive.
What does this all mean in short?
In summary, a preapproval will give you confidence to go to market and negotiate on properties that you like.
Once pre-approved you’ve got 3 to 6 months to find a property and use your pre-approval.
More importantly your broker will be there every step of the way to help you through out if you have any questions or concerns about the process, or even queries about the contract before going ahead.
Help this is all confusing
If you are a first home buyer speak with one of our experienced mortgage brokers to walk through the next steps with you.
At Hunter Galloway we help first home buyers get ahead in this competitive market, we give you the actual strategies that have helped other first home buyers like you secure a property when there have been 5 other offers on the table! Enquire online or give us a call on 1300 088 065.