If you’re thinking about purchasing property soon, it pays to have a pre-approval in place. Not only does it provide comfort that a lender is likely to lend you the funds you need to buy a house, but it can also speed up the assessment process once you’ve had an offer accepted, as outlined here in our recent blog post “What you need to know about a pre-approval.’
Here, we provide some more information about pre-approvals and cover the additional things you want to know – like ‘Can I increase my pre-approval amount?’ (Perhaps our most frequently asked question right now given the current ACT property market!)
Why should I have a pre-approval before seriously house hunting?
If you have a pre-approval in place, it means that a lender has reviewed your application and agreed in principle to lend you funds for a purchase. With a manually assessed pre-approval, a lender will review your payslips, bank statements and check your credit file to ensure you’re going to be a quality borrowing candidate.
Which is why it’s generally a good idea to have a pre-approval in place BEFORE you start making offers on properties. Otherwise, how do you know a lender is going to provide the funds you need to purchase the property you’ve just made an offer on?
In addition to providing comfort around your borrowing capacity, depending on the service levels of your chosen lender, having a pre-approval in place can sometimes speed up the full assessment process once you’ve had your offer accepted.
Depending on the lender, assessment of a pre-approval can take a week or so to be completed (recently with some lenders, it’s been taking much longer). So if you’ve already been pre-assessed, once you’ve had an offer accepted, the lender is merely checking to ensure a) your circumstances haven’t changed since your pre-approval; and b) the property you’re purchasing is worth what you’re paying for it.
How do I set my max pre-approval purchase price?
The answer will depend on the below factors:
– Your borrowing capacity
Your maximum borrowing capacity is the absolute upper loan limit a lender is likely to lend you the funds. It is based on a combination of your monthly incomings / outgoings as well as how much cash you have available to contribute towards the purchase.
Typically borrowers don’t lodge pre-approval applications for their *absolute* max borrowing capacity, because you may want leave some capacity to accommodate for future interest rate changes or you may wish to return a cash buffer post settlement.
– Your comfort levels around debt
The idea is to be pre-approved for the loan amount that will allow you to buy the type of property you’re after.
However, if the idea of making repayments on a loan above $600,000 makes you break out in a sweat, you need to take this into consideration when coming up with your desired pre-approval max purchase amount.
– How much you need to spend to secure the type of property you’re after
You first need to be comfortable with the proposed loan amount, but you also need to be realistic about what your money can buy right now. i.e. you need to have a good idea of what properties are currently selling for, so you’re establishing a practical pre-approval limit.
We know this can be hard to get right in a rising market when property prices are rising so quickly! Something to keep in mind, it’s always easier to go back to a lender once you’ve had an offer accepted and ask to borrow less money because you’ve found a property for less than your max purchase price. Going back to the lender to ask for a higher loan amount (because your initial pre-approval limit was way too low), isn’t always so easy….
Once I am pre-approved, can we go back and ask the lender to increase my pre-approval limit?
Whether it’s possible to increase your pre-approval limit will depend on the lender. Some lenders won’t look at a pre-approval again until you have had an offer accepted on a property, whilst others will allow the pre-approval limit to be increased.
We suggest you carefully consider this decision at the start and try to get it right the first time. This will avoid you having to provide supporting documents to the lender (again!) and will also reduce any time delays you’ll face whilst sitting around waiting for the lender to re-assess and pre-approve your application (again!)
Can I buy something above my pre-approved limit?
If you submit an offer on a property above your pre-approved purchase limit, your pre-approval is essentially rendered useless.
The whole point of the pre-approval is to give you comfort that a lender will lend you funds up to an amount. If you go higher than this, there is no comfort – because you have not been pre-assessed at this higher loan/ purchase amount.
In most cases, if you want to increase the purchase price above your pre-approved limit, the only way you can do this is to keep the proposed loan amount the same and increase your cash contribution. Please have a chat to us BEFORE you even think about doing this.
How long will my pre-approval last?
Typically a pre-approval will last for 3 months, although with some lenders your application remains active in their system for up to 6 months.
What happens when my pre-approval expires?
Depending on the lender, we may be able to extend your pre-approval for an extra few months – by providing updated supporting documents (i.e. payslips etc) to confirm your position is still the same as when your application was initially assessed. In most cases though, an entirely new application will need to be lodged. Whilst this isn’t an issue in itself, it means your borrowing capacity will be re-assessed using rates and servicing metrics current at the time a new application is lodged. When rates are increasing, if you’re applying for a pre-approval at the top of your borrowing capacity, it typically means that if/ when we go to lodge another application, with all else being equal, your maximum loan amount/purchase price achievable is typically less.
If you’re keen to get your own pre-approval underway, please give us a call on 02 62866501. Alternatively, you can get started here.
