Caylum Merrick, Momentum’s Property Strategy and Finance Manager, says it’s important to know what your lender is really offering with a home loan pre-approval.
There’s a lot to love about a home loan pre-approval. In fact, it can give home buyers an edge at multiple points in the buying journey.
At the earliest stage, when you’re deciding price limits, a pre-approval provides clarity on your buying budget. This is especially valuable if you are buying at auction as pre-approval sets a firm line in the sand for your highest bid.
Having a pre-approval in place also strengthens your offer on a property. It shows the real estate agent and seller that you have finance lined up, providing confidence that any offer you make is unlikely to fall through due to problems securing finance.
Pre-approval allows buyers to take advantage of competitive contract terms. Some sellers, for instance, may want a shorter-than-normal settlement (this can be the case if they have committed to buying another property). A buyer with mortgage pre-approval is in a far better position to agree to this sort of request, thereby putting themselves ahead of the competition.
More broadly, in today’s competitive market, where the supply of listed properties is tight, a pre-approval can enhance a buyer’s negotiating position. Such is the state of the market, that anecdotally, some home sellers and listing agents may refuse to sell to someone without a pre-approval in place1.
What exactly does pre-approval mean?
It’s worth clarifying that home loan pre-approval is not a guarantee you will be offered a home loan.
This is why pre-approval is formally known as ‘conditional approval’ or ‘approval-in-principle’.
It means the lender has agreed, in theory at least, to offer you a home loan. Final or unconditional approval won’t be given until the lender has assessed the property you want to buy, to be sure it meets the bank’s lending criteria.
Final approval will also hinge on whether any significant changes have occurred in your own financial situation such as a change of jobs.
Not all pre-approvals are the same
While pre-approval offers valuable upsides, the catch for home buyers is that not every lender offers pre-approval.
Even among those that do, pre-approval doesn’t always mean the same thing.
When something as significant as buying a home is at stake, it pays to be quite clear on what exactly your bank’s pre-approval involves.
First up, let’s clarify that online ‘borrowing capacity’ calculators designed to show how much you can borrow are not a form of pre-approval.
These calculators can be handy to get a rough idea of your borrowing power, but relying on them to make an offer on a property is a high risk strategy. For a whole variety of reasons, the amount a bank will actually lend you can be very different from the figure shown in an online calculator.
Further along from this, there are two main types of pre-approvals:
System-generated pre-approvals are typically carried out by your lender’s software based on the information you provide. This allows a response to be generated very quickly. However, as this type of assessment is far less comprehensive, the results may not be accurate.
In addition, system-generated pre-approvals rely on the details you enter into the system. Make a mistake, and you could be wrongly approved – or denied – a home loan.
Do these types of pre-approvals have any merit? Possibly. If you encounter a seller or agent who demands to see evidence of pre-approval, a system-generated pre-approval may get you across the line.
Given the potential for an inaccurate result though, I recommend a fully assessed application.
Fully assessed pre-approval
Fully assessed pre-approvals are far more comprehensive. This means your lender’s credit assessment team will take a close look at your finances as well as your personal credit score to make a pre-approval decision.
This depth of analysis can take more time. The benefit is a far more accurate decision – one you can have confidence in while you are home hunting.
To find out which lenders offer pre-approval and what you can do to get the ball rolling on a home loan pre-approval, contact our finance team at Momentum Wealth.