In this post, I’m going to break down EVERYTHING you need to know about pre approvals.
What they are.
Why they’re important.
And whether or not they will help with buying a home.
Let’s dive right in.
- What is pre approval?
- Why is a pre approval important
- When’s the right time to get a pre approval?
- What is the pre approval loan process?
- What to do once an application is submitted?
- What are some common approval conditions?
- How do you know if you can rely on your banks pre-approval?
- What are some questions I can ask to make sure I have a real pre-approval?
- Are there any specific lenders that tend to provide unreliable approvals?
- What are some common mistakes?
- What’s next when you are approved?
- Does the type of property matter?
- How do I make an offer on a property?
- Help this is all confusing
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, based on your income and savings.
In some cases, a pre approval doesn’t get assessed by the bank, or lenders credit department and in all cases a pre approval is not assessed by the lenders mortgage insurer (LMI).
In other words 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.
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.
Why is a Pre Approval Important
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.
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 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, a number of loan products and lenders will be recommended by them.
- Once you select a lender, the loan application is submitted to the broker, along with all the documents
- The lender evaluates your application and provides a home loan pre approval
What to Do Once Application is Submitted for Home Loan Pre approval?
Make sure the loan application is in line with the bank policy before you submit 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 your application been approved by the lender’s mortgage insurer?
- ✅ Has your application been accepted by the credit department?
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.
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:
- ✅ Our validation of all details provided to ensure they are true and correct.
- ✅ Our receipt of all necessary supporting documentation (Please print the Application Checklist from the Forms section of the broker website for the information we require now).
- ✅ Satisfactory valuation for the proposed security property(s). We will arrange for this to be undertaken where the Bank requires a valuation be completed.
- ✅ Lender’s Mortgage Insurance approval, if required.
- ✅ No significant change in the customer’s financial position.
- ✅ Once all of the conditions are satisfied we can issue loan agreements(s).
- ✅ The loan agreements(s) and other documentation will set out requirements which have to be met before loan funds will be made available.
- ✅ Customers must sign and return the loan agreements(s) within the first 90 days from the date of this letter or we may require you or your customer to revalidate their financial position.
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 an actual credit assessor hasn’t reviewed the application to double check the numbers match – for example, that the income details that have been entered match the payslips provided.
How do you know if you can rely on your banks pre approval?
Not all banks are the same when it comes to assessing a pre-approval home loan, also known as a conditional approval, indicative approval, approval in principle or home seeker depending on the bank you use.
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 or 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 and means the lenders will complete the entire assessment of your loan, they will verify 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 then fully 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 request that our clients pre-approvals are fully assessed by the lender or the bank if for some reason this is not possible they will let you know.
To make sure you are protected a few questions you should ask your banker or broker to make sure your loan application has been assessed and you have a real pre-approval include:
- ✅ 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 toeing with. In this case, your loan could be declined in the future.
Are there any specific lenders that tend to provide unreliable approvals?
Again you should ask your banker or broker the above questions, but you can be cautious of any system generated approvals from St George Bank, Westpac Bank, Suncorp, ANZ, NAB or any other bank that gives an on the spot pre-approvals.
If you have a NAB pre approval, or ANZ pre approval you should make sure to ask the questions above to confirm it is a real approval. 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 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.
In the case of many of these banks while they may complete a credit check, and provide approval in principle your application hasn’t been assessed from the credit department and therefore the bank could change their decision to lend you the money at a later date.
What are some common pre-approval mistakes?
As your 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.
Some common mistakes first home buyers make include thinking any type of property can be purchased.
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’s next when you are pre-approved?
Now it’s time to go shopping!
When you’re looking online be sure to select your bracket that you want to purchase in. So let’s say you’re looking at a $500,000 purchase.
You might be putting houses between $400,000 and $500,000. An interesting thing we found in the past is sometimes you’ll get higher priced properties to come up in this bracket. So reduce your bracket a little bit further maybe from $300,000 to $500,000 which gives you a far larger range of properties to look out.
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 it.
Now, remembering when you do find the right property to 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, so any reports you need feel free to contact us, and we’re only too happy to provide them.
Does the type of property matter?
Unfortunately, not all properties are acceptable for all banks! One thing to keep in mind is when you do find the right property to ensure that you’ve checked with your mortgage broker if the property is acceptable.
Things like properties with less than 50 square meters internally can be an issue with some lenders. Also if they’re greater than two hectares that can be another issue.
As a broad rule of thumb, make sure you double check with your broker before buying any property that fits in 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.
How do I make an offer on a property?
Now you’ve finally found the perfect property, what happens next? When you find the right property you’re going to want to put an offer on it.
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. Depending on the state you may put five days cooling off period in the contract. You might put 14 days to finance. It might be longer and it might be shorter.
Once again, check with your conveyance or talk to your mortgage broker, and they’ll be able to guide you through this. This is something that we do a lot here at Hunter Galloway is ensuring that our first homeowners have the right terms to be competitive, as well as to protect them if anything does go wrong.
Help this is all confusing
If you are a wanting 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 with you.
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 5 other offers on the table! Enquire online or give us a call on 1300 088 065.