What is a pre-approval?
A pre-approval (or Approval-in-Principle) is when a lender has assessed your application and conditionally approved you to borrow a specific loan amount, based on a max property purchase. Whilst a pre-approval doesn’t 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, a 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’ve 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, it’s been discovered that it wasn’t actually a pre-approval at all.
What generally happens in these situations is that the lender has advised the borrower they 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 to determine that a lender won’t have any major issues with lending you funds.
Something else we need to consider in a cycle of rising interest rates, is that an interest rate rise can reduce your borrowing capacity (even if you have a pre-approval in place). This is because many lenders will re-examine your ‘capacity to repay’ at the time you seek Formal Approval for a specific purchase. If rates increase after your pre-approval is issued but before you find a suitable property to purchase – and your pre-approval was already at the top end of your borrowing capacity – then you may have issues getting a loan Formally Approved.
To avoid this from happening if you have a pre-approval in place, we suggest you:
- keep an eye on rate changes
- keep us updated on your house hunting efforts AND
- before you place an Unconditional Offer (or secure a property at auction), have us re-confirm your borrowing capacity.
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.
Once you have had an offer accepted and it’s time to convert your Pre-Approval to a Fully Approved loan, it’s generally a matter of providing a copy of the Contract, conducting a valuation of the property and providing some updated payslips to verify your income position hasn’t changed.
If you thought you had a ‘pre-approval’ in place, but now you’re not so sure (because your financial situation was properly assessed), give our team a call on 02 6286 6501. We’d be happy to help.
