In this post, I’m going to break down everything you need to know about pre-approvals.
What they are and why they’re important.
Let’s dive right in.
- What is pre approval?
- Why is a pre approval important
- When is the right time to get a pre-approval?
- What is the pre approval loan process?
- What are some common approval conditions?
- How do you know if you can rely on your banks pre-approval?
- Are there any specific lenders that tend to provide unreliable approvals?
1. What is Pre Approval?
A pre-approval is an indication from a lender that they are willing to approve your loan when you find the right property. It is also known as a conditional approval, indicative approval, approval in principle or home seeker, depending on the bank you use.
Basically, a pre-approval means the bank will lend you X amount of money, provided you find a suitable property and your income and circumstances don’t change.
Having a pre-approval allows you to make stronger offers on property with shorter finance terms, meaning you can get a better deal and buy the home of your dreams sooner.
In some cases, a pre-approval doesn’t get assessed by the bank or lender’s credit department, and, in all cases, a pre-approval is not assessed by the Lenders Mortgage Insurer (LMI).
Always remember that a pre-approval tells you that a bank or lender is highly likely to approve your loan when you apply, but it’s never a guarantee…
2. Why is a Pre Approval Important
A pre-approval helps you know:
- how much the bank is going to lend you.
- the actual amount of deposit you are going to need.
- what your cash flow is going to look like after you’ve purchased your new home.
- How much to budget to purchase your new home. It helps you also determine your walk-away price, which is the price you are not willing to go beyond.
It is even more important to have a pre-approval in a competitive property market. We often 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.
It goes further than simply missing out on a property – sometimes, not having a pre-approval can actually cost you money. For example, if you are successful at a property auction, you will need to pay a 5% deposit on the day. If the bank declines your application after winning the auction, you can say goodbye to that deposit.
There’s no cooling-off period when buying at auction in most states. So if you can’t get approved for a home loan, then you forfeit your deposit. Even worse, the sellers are allowed to claim the cost of re-listing the property and any difference in the final sale price and the price you bid at auction.
So on a property worth $400,000 you could lose a minimum of $20,000 by not having a pre-approval – and potentially much more.
3. When is the right time to get a pre approval?
You should get a pre-approval before you start shopping around for properties. Although pre-approvals aren’t 100% bulletproof, they can give you confidence when putting offers on properties.
Getting a pre-approval before you start checking out properties will help you narrow down your search and look for properties you can actually afford in the longer term.
A pre-approval gives you the ability to budget and work out your lending capacity. You get a complete understanding of what your loan repayments will 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 or getting your heart set on a property that you absolutely love but is outside of your budget.
Ultimately a pre-approval will give you the confidence to start looking at properties, talking to real estate agents and negotiating, knowing you can afford that particular property you’re interested in.
4. What is the pre approval loan process?
The following steps are involved in the pre approval loan process:
- Sign an application form of a mortgage broker.
- Provide proof of loans, credit cards, savings, and income.
- When a mortgage broker completes the preliminary assessment, they will recommend a number of loan products and lenders.
- Once you select a lender, the broker will submit your loan application to the lender, along with all the documents.
- The lender evaluates your application and provides a home loan pre approval.
The pre-approval process differs from bank to bank and depends on which mortgage broker you use. Here at Hunter Galloway, we have a comprehensive process to help you get a reliable pre-approval. Our process is as follows:
- Initial free assessment. During this call, one of the brokers here at Hunter Galloway will do a quick review of your financial goals, your financial situation, and your eligibility for a home loan. We’ll make sure that you’re ready to buy and help you decide the next steps for your home buying journey.
- We collect your financial information.Your primary contact at this stage is the Credit Analyst. The information we collect is:
- Your Details. We need to collect some basic details about you and your co-applicant (if applicable). This includes your contact information, residential details, employment situation and income, assets and liabilities. We do this using a simple form.
- Your Supporting Documentation. We will ask for some supporting documentation to help us to review your file. This will include payslips, bank statements, and other documentation, depending on your situation. We collect this using a secure, encrypted online tool.
- We do a credit analysis. Once we have collected your details and documentation, our expert credit analysis team gets to work. We have developed a systematic review process to assess your chances of getting your home loan approved, split into three core components:
- Your credit file. Our analysts will comb through your credit report to make sure it is accurate. We will make sure that any debts recorded are correct and that your payment record is accurate. If there are defaults, we will review them to ensure that they are genuine and reflect your actual credit situation.
- Your employment history, job, and income. Your length of employment, job type, and income significantly impact which banks or lenders will be willing to offer you a loan.
- Your deposit. Your deposit is the other main factor in your ability to get a loan. We will review your deposit and access to additional funds (such as grants) to see whether you have enough deposit to qualify for a loan.
We take the information gleaned from the credit review process and use a custom loan policy checker that checks over 4,890 data points across our panel of lenders to see which lender will be your best .
- We send your information to the bank or lender. Once our internal credit team and your broker have reviewed your file, we will send your pre-approval application to your chosen bank or lender. We will work with them to get your pre-approval completed as quickly as possible, but bear in mind that this takes time—usually 1 to 3 weeks.
Once your pre-approval is complete, we will give you a call to go through the details and give you the resources and tools you need to get out there and find your new property.
Questions to ask about your pre-approval
If you’re applying directly with a bank or lender, make sure the loan application aligns with their policy before submitting it. You can seek the advice of a lender or a mortgage broker to make sure it adheres to the policy and ask the following questions:
- Can you make a bid at the auction?
- Are you required to satisfy conditions before going to the auction or making an offer?
- What are the pre approval conditions?
- Has the lender’s mortgage insurer approved your application?
- Has the credit department accepted your application?
Important reminder: lending policies and interest rates vary from time to time and are subject to change. So, when you go to an auction, make sure you are aware of the policies and current rates.
5. What are some common approval conditions?
In most cases, a pre-approval has conditions that need to be fulfilled before the loan can be unconditionally approved. These can range from generic conditions, like subject to valuation, or specific ones like obtaining a letter from your employer.
A few bank terms & common conditions include:
- ✅ Validation of all details provided to ensure they are true and correct.
- ✅ Receipt of all necessary supporting documentation.
- ✅ Satisfactory valuation for the proposed security property(s). We will arrange for this where the bank requires a valuation.
- ✅ Lender’s Mortgage Insurance approval, if required.
- ✅ No significant change in the your financial position.
Once all of the conditions are satisfied, the bank can issue loan agreements(s). The loan agreements(s) and other documentation will set out requirements to be met before loan funds are made available. You will need to sign and return the loan agreements(s) within the first 90 days from the date of this letter, or they may require you to revalidate your financial position.
6. How do you know if you can rely on your bank’s pre approval?
Not all banks are the same when it comes to assessing a pre-approval home loan.
It’s important to remember that In most cases, a pre-approval is just an indication that the bank is ok to consider approving your loan. They may just complete a credit check and not check any of your documents and wait until you lodge a full mortgage application to do this.
A full mortgage application is done when you find a property, which means the lenders will only complete the entire assessment of your loan—verifying your payslips, bank statements, your income information, savings information and any liabilities you have—to be 100% sure they can lend you the money.
Unfortunately, if you have gone out and got a pre-approval from a bank, the lender is under no obligation to approve your loan once you have found a property. They can say your situation has changed and knock you back.
What are some questions I can ask to make sure I have a real pre-approval?
Our team at Hunter Galloway always requests that the lender or the bank fully assesses our clients’ pre-approvals. If, for some reason, this is not possible, we will let you know.
To make sure you are protected, below are a few questions you should ask your banker or broker to make you have a real pre-approval:
- Has my application gone to the credit department?
- Have LMI approved my application?
- What are the conditions of my approval?
- Can I bid at an auction based on this approval?
If you are given an on-the-spot approval or system-generated approval, your home loan was never really approved. In this case, your loan could be declined in the future.
As you can see from the example above, the bank hasn’t actually assessed the home loan application and while the details entered into their lending system are acceptable. A credit assessor hasn’t reviewed the application to double-check that the numbers match—for example, that the income details match the payslips provided.
7. Are there any specific lenders that tend to provide unreliable approvals?
Again you should ask your banker or broker the above questions. Still, you should be cautious of any system-generated approvals from St George Bank, Westpac Bank, Suncorp, ANZ, NAB or any other bank that gives on-the-spot pre-approvals.
While many of these banks may complete a credit check and provide approval in principle, your application hasn’t been assessed by the credit department and therefore the bank could change their decision to lend you the money at a later date.
If you aren’t sure, get in touch with our team, call us on 1300 088 065 or get in touch online so we can review it for you.
At Hunter Galloway, we work with lenders that will verify your income and deposit information to ensure you have a verified pre approval.
Bonus: What are some common pre-approval mistakes?
- Thinking your pre-approval is the same as a formal, unconditional approval.
We have been mentioning this quite a lot in this article, and this is because it is crucial to keep it in mind always. Getting a loan after a pre-approval is subject to getting your updated income information, obtaining a valuation to ensure the property is suitable and an updated credit file.
- Thinking that you can purchase any type of property.
Sometimes after the pre-approval, the type of property that you ultimately purchase may be deemed unacceptable. Some banks have restrictions on lending for units, while others will restrict you based on bushfires or flooding restrictions. So make sure the property you want to purchase is acceptable to the bank before getting the pre-approval. As a broad rule of thumb, make sure you double-check with your broker broker before buying any property that fits these criteria:
- Smaller than 50 square meters inside.
- Land size over 2 hectares.
- Doesn’t have standard title and zoning.
- Not in a major town or city.
- Includes incentives like furniture packages, or rental guarantees.
- Is run-down or in disrepair and needs lots of work to fix up.
So it’s always important to double-check with your broker before you start going too far down the path of purchasing your property.
- Not knowing that the bank and the insurer are two separate entities.
This is a huge issue. Let’s say the bank has actually taken the necessary steps and have issued a fully assessed pre-approval, and you’ve got your golden ticket. This may be short-lived because, whilst you meet the lender’s criteria, you may not necessarily meet their mortgage insurance criteria. For example, if your property is close to high tension power lines, it might be acceptable to your bank, but it may not be for your insurer.
- Not knowing you are stuck with the bank you got the pre-approval from.
You should only get a pre-approval from one bank at a time to avoid damaging your credit score by making lots of applications in a short period. So if another bank or lender announces a new, better rate, you will have to re-apply for a pre-approval (and potentially damage your credit file) or accept the increased costs of staying with your current lender.
- Thinking pre-approvals last indefinitely.
Most pre-approvals only last for 90 days. Some banks will allow 180 days, but either way: if for any reason you are not able to find the right home within that time frame, you’ll need to re-apply for another pre approval. That means wasted time and effort on your part, plus you’ll have to hit your credit file again in 90 days time for an updated pre-approval.
Bonus: What’s next when you are pre-approved?
Now it’s time to go shopping! Follow these steps:
- Determine how much you are willing to spend—your budget.
For example, you may be pre approved for $500,000 but decide you only want to spend $450,000.
- Start looking on RealEstate, Domain, and local real estate agents websites to find a property to buy.
When you’re looking online, be sure to select the price bracket that you want to purchase in. So let’s say you’re looking at a $600,000 purchase. You can search for houses between $500,000 and $600,000. Sometimes you’ll get higher-priced properties come up in this bracket. So, reduce your bracket a little bit further—maybe from $400,000 to $600,000, and this will give you a far larger range of properties to look at. The best part of these websites is that you can set up real estate alerts, so when properties you like come up on the market you’ll be the first to view them.
- When you do find the right property, do your research and find as much information as you can online. You can use websites like Onthehouse and RP Data. Some sites like RP Data will charge you a fee to obtain a report or even require you to get a subscription. Luckily, here at Hunter Galloway, we’ve got access to RP Data. Feel free to contact us for any reports you need, and we’re only too happy to provide them.
- Once you have done your research, you make an offer on the property. At this point, it doesn’t hurt to get your conveyancer or solicitor to check over the contract before you go ahead. You want to ensure that you have standard finance clauses in the contract. Here at Hunter Galloway we ensure that our first homeowners have the right terms to be competitive, as well as protect them if anything does go wrong.
Read More: Property Market Research | 12 Steps to Research a Home in Brisbane
Read More: Negotiate the house price with a real estate agent
Read More: 13 Insanely Actionable Tips to Making an Offer on a House [2019 update]
Help this is all confusing
If you want to get a pre-approval or buy a home, speak with one of our experienced mortgage brokers to walk through the next steps of home loans in Brisbane.
At Hunter Galloway we help home buyers get ahead in this competitive market. We give you the actual strategies that have helped other home buyers like you secure a property when there have been five other offers on the table! Enquire online or give us a call on 1300 088 065.