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What you need to know about a pre-approval

Pre=ApprovalWhat is a pre-approval?

A pre-approval (or Approval-in-Principle) gives you an idea of how much a lender will let you borrow, based on your current finances.  Whilst it does not guarantee funding and is subject to terms and conditions, it can give you the confidence to start seriously looking for a property to buy.

If a pre-approval doesn’t guarantee funding and is subject to terms and conditions, should I bother getting one?

Yes!

The lender will assess your pre-approval application by looking at your income, current liabilities, employment situation, your asset position and credit history.  If there are any questions, it’s good to have a lender ask them at this stage, BEFORE you’ve made an offer on a property.

Providing everything looks ok, pre-approval will be issued for a certain loan amount.  This means you can start property hunting, knowing what purchase price is achievable.

A pre-approval can also speed up the process once you’ve found a property and possibly allow you to exchange quicker.  Since you’re already pre-approved, the lender should be able to issue Formal Approval much faster because they are not assessing everything.  They have already assessed the servicing side of things and at this stage, the lender is mainly checking the details of the property.  They will also want to check your income hasn’t changed since submitting the Pre-Approval and you haven’t recently bought a Ferrari 🙂

Is there anything I need to be careful with?

Yes.  Sometimes, a ‘pre-approval’ is not really a pre-approval.

“Based on your income, you could theoretically afford repayments of $x and therefore afford a loan of $y.” 

If someone has said this to you, but you have not submitted a loan application or had your financial situation assessed, you need to be careful – especially if you’re relying on this to make an offer on a property.

We’ve had a few clients recently come to us thinking they had a pre-approval in place with a lender.  However, when they’ve gone back to secure the loan after committing to a property purchase, the lender has declined to lend them money.

What generally happens in these situations is that the lender has said a borrower can purchase property up to a certain value but has not consulted lending policy, nor have they performed thorough checks on the borrower’s financial situation.

You want your pre-approval application to be assessed more rigorously.  Whilst it will still be subject to terms and conditions and provides no guarantee of funding, you want someone experienced to delve a bit deeper into the application to ensure it fits with the lender’s borrowing criteria.

How do you apply for a pre-approval?

It’s generally the same process as if you were applying for a full loan approval, but you don’t provide details of a property.  But don’t worry, this doesn’t mean you go through the application process twice.

A pre-approval normally lasts for 3 months so if you find a property and want to convert the Pre-Approval to Full Approval within this time, it’s generally a matter of providing a copy of the Contract (and maybe some updated payslips) and that’s about it.

 

If you have a ‘pre-approval,’ but you don’t think your financial situation was properly assessed, give our team a call so you can put in an offer or bid at auction with confidence.




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