In any game, getting a head start is a huge advantage that tremendously increases your chances of winning. Buying a home works in the same principle — especially in times of stricter competition, the odds are in favour to those who have done their homework.
A home loan pre-approval provides you with a huge head start in your property purchase journey. Imagine it as being a ticket to making the home buying process easier and more convenient.
Different lenders call it by several names — conditional approval, indicative approval, approval in principle — but they all tell you if you are likely to be approved for the amount you are planning to borrow.
How long does a home loan pre-approval last?
If your lender grants you this head start, take note that how long it stays valid differs depending on your lender and your current circumstances. For most banks and lenders, home loan pre-approval usually lasts for 60 to 90 days. While this seems long enough, some borrowers might still struggle to find the right home within that time period. In such cases, you will have to re-apply for another mortgage approval and your lender will reassess your financial standing.
Does a pre-approval guarantee you of a home loan approval?
Here's where it gets tricky. A pre-approval only serves as an indication that your lender is willing to approve your loan when you submit a full application. Your lender is in no way obligated to grant you a full home-loan application approval even if you have a pre-approval. The process of a home-loan approval is different from that of getting a pre-approval.
Here are some reasons why your pre-approval might not help you get a full home-loan approval
1. The property you are planning to buy is considered risky
Property assessments are not included when you apply for pre-approval. Banks have different policies regarding the type of properties you can buy. High-risk homes like inner-city apartments or dwellings in bushfire-prone areas might risk your chances of getting a home loan approved.
To avoid being declined, stick to standard residential homes. If in doubt, ask your lender about their policies about homes.
2. The lender's insurance provider rejects your application
If your loan amounts to more than 80% of the value of your property, you will have to pay for lenders' mortgage insurance (LMI). Usually, applications for such loans also need the approval of the lender's mortgage insurer. The insurance provider might not agree to cover your loan if it has different guidelines.
This is one of the reasons why it is best not to borrow more than 80% of the value of your property. Prepare to save enough for the deposit to increase your chances of getting your home loan approved.
3. Your financial status changes
A new career, a big purchase, or any life event that can alter your financial status will impact your chances of getting a full home-loan approval. When any of these happen, your lender will have to re-assess your application and see to it that you still meet their lending policies.
4. Official interest rates change
Lenders use the central bank's decision to move the official cash rate to determine the cost of home loans. When banks give pre-approval, they typically give borrowers the maximum loan amount possible. However, if interest rates increase, your borrowing power might dwindle. This means that when you apply for a home loan, you might not get approved for the amount that is stated on your pre-approval.
What are the advantages of having a pre-approval?
Now that you know how long a home loan pre-approval lasts, you can take advantage of this ticket to succeed in your home endeavours. Here are some of the benefits of having a pre-approval.
1. A pre-approval gives you an edge at auctions
It is a must for you to apply for a pre-approval when participating in auctions. You do not want to be called out as the highest bidder for a property you cannot afford, so it is a must that you know where you stand. A pre-approval allows you to bid with certainty given that you will be committed to purchase once the hammer falls.
2. A pre-approval helps you lead the negotiating table during a private sale
A home loan pre-approval will also be your friend when you negotiate for properties sold through private deals. Having a pre-approval will make your vendor see you as a serious buyer while at the same time boosting your negotiating power.
3. A pre-approval shows you where you stand
As mentioned earlier, a pre-approval allows you to determine how much you can afford. It essentially tells you how much you can borrow given your current financial standing. Having a clear idea about this will help you find the right home that fits your budget, eventually saving you time and effort.
What are the conditions of pre-approval?
There are two ways you can apply for a pre-approval. There are online pre-approvals that can be applied for through your chosen bank’s website. However, this may not always give an accurate result of how much the bank would actually be willing to give you once you apply for a formal approval.
It is more advisable to get your pre-approval directly from your bank’s branch. When you apply, make sure of the following:
- You should supply accurate and complete information
- Your lender should receive all the documentation necessary to verify your deposit, security, assets, liabilities and income
- You should make sure that your lender has a satisfactory assessment, including a valuation, of any property offered as security
- It is also crucial to determine whether lenders mortgage insurance is required. This happens when you are not planning to give a 20% deposit when you apply for a formal approval for your mortgage
What would make banks reject a pre-approval application?
Before you apply for a pre-approved loan, you should be fully aware of the reasons why some pre-approval applications are rejected. This way, you can ensure you meet the criteria before applying.
If you tick at least one of the things in the list below, there is a high chance that your application for pre-approval will be rejected.
- You cannot properly document your income
- Your credit rating is low
- You have too many enquires on your credit file. Take note that all your loan applications will appear on your credit report, and several marks can make your lender suspicious
- Your financial situation has changed. For instance, you have recently changed jobs or got another type of loan
- The policy of the lender has changed. Take note, however, that some lenders will still honour pre-approvals that are lodged before their policy changes
- Interest rates have increased. When this happens, the maximum amount that you can borrow will likely decrease
What are the steps involved in the home loan application process?
Applying for a home loan can be a long and complicated process. With many steps involved, people don’t often know where to start. To help you get started, here is the standard process for taking out a home loan:
For all intents and purposes, a pre-approval is an approval subject to a full variation of the property you want to buy.
Also known as indicative or in-principle, pre-approval is not yet full approval, but getting a pre-approval on your home loan can benefit you in many ways:
- You will know the maximum amount you are allowed to borrow and what your mortgage repayments will be
- It will give you an idea on what type of properties you can buy and in what location
- Going through the pre-approval stage early will save you time in the home loan application process
Lenders offer different types of pre-approvals, which can range from a simple two-minute online application to a formal document. If possible, you will want to avoid non-formal, non-written applications as they have far fewer guarantees and can come with many unknown conditions that you must meet at a later date.
A pre-approval will only be reliable if it is formal, written and signed by the lender. Securing a formal pre-approval is the only way to make sure you can negotiate with sellers confidently. Without a signed letter, some sellers and real estate agents will not accept your offer, as they cannot guarantee that you will be able to get the necessary finance.
To get pre-approval, you will need to submit a completed mortgage application form along with the supporting documents that the lender may ask for including:
- Acceptable forms of ID
- Payslips for the last three to six months and other financials such as your most recent group certificate or a Notice of Assessment if you are self-employed
- Evidence of savings and/or your deposit – usually in the form of a bank statement
- Statements of current debts and expenses such as credit cards, phone bills, and rent
Once you have submitted these documents, the lender will assess your application and then confirm if you meet their policy. A pre-approval is valid for 90 days with most lenders but you can extend it, if the need arises, by providing updated payslips and other documents.
Once you have chosen a property to buy, a valuer will make an appointment to inspect the property. Banks don’t usually employ valuers; as a result, the timeline can vary. In some instances, tenants may delay the valuer from gaining access to the property. The faster the valuer can access the property, the quicker your lender can process your application.
Formal Approval/Unconditional Approval
An approval is formal when the lender has everything they need and can confirm in the form of a letter that they are willing to lend you money. This is the final guarantee that you will need for the property purchase. In some instances, they may just ask for additional documents before finalising the approval. This is normal for complex applications or when you have not provided everything they need upfront.
Once your offer has been accepted by a seller, you may have a one to three-week grace period to get your finances and deposit in order. During this time, you can check with your lender and make sure they will honour the agreement. Even if you don’t have this grace period, contact your lender and make sure they will finance your loan.
Loan Offer Issuance
Once your loan has been formally approved, the lender will send you a loan contract for you to sign to accept their loan. You can go through this contract with your solicitor if you would like to seek independent legal advice.
Upon signing the contract, you may return it to the lender with any requirements they need to settle the loan.
Once the lender has certified that all of your documents are in order, they can then advance the loan funds. For a new purchase, they will let your solicitor or conveyancer know that the funds are available. Your conveyancer will then book in a settlement date and time with the lender.
For a refinance loan, your new lender will arrange with your current lender to repay their loans and take possession of your certificate of title. They will book in a time to meet and sort this out automatically.
After the settlement, your lender will send you a letter confirming your home loan details, including repayment amount and schedule. From this point, the lender will manage your day-to-day loan questions.
How long does the home loan application process take? Generally speaking, it takes four to six weeks from submitting your application to a lender to reaching settlement on your property, depending on which state you live in. However, other factors – such as the lender, the complexity of your situation and how quickly you return your mortgage documents – may affect the speed of the application process. For instance, lenders who offer low interest rates often have slower processing as they receive more home loan applications.
In terms of the step-by-step process, this is the most common scenario:
When the lender receives your loan application, it can take anywhere from four hours to two weeks for them to complete the pre-approval.
The property valuation can take from one day to one week, as well as the formal approval. Some will only do a “kerbside valuation” just to confirm that there is really a property located at the address provided, so you can possibly expect a formal approval from your lender the next day. If a full valuation is necessary, it could take five to seven business days depending on how quickly the seller or real estate agent allows access into the property, as well as on the availability of the valuer.
If you are borrowing more than 80% of the value of the property, you will need to pay lender’s mortgage insurance (LMI). This may take one or two business days after the valuation has been received.
Once a valuation has been undertaken and you have been formally approved, you can sign the Contract of Sale with the help of your conveyancer. The time it takes between getting formal approval and the contract signing will depend on how organised you and the seller are. Typically, the seller’s conveyancer will send the contract to your conveyancer and you will then organise a meeting to discuss the terms and conditions. A day or two can be enough so that you will not rush into the sale. Meanwhile, the lender will be preparing the loan offer documents for you to sign, which can take two to seven days.
It is at this stage that you negotiate the settlement date, which is typically set for four weeks after the contract signing. But if things go wrong, is it possible to change the settlement date.
Is it possible to speed up the home loan application process?
Yes, it is possible to get a home loan approved more quickly. Here are some of the ways:
- Read each mortgage document carefully
- Provide all the documents that the lender asks for the first time around
- Make sure your supporting documents are the most up-to-date ones
- Disclose all the necessary information in detail
- Sign the mortgage documents and return them as soon as you have agreed to the terms and conditions
- Know your credit history even before you apply for a mortgage
- Know the best time to apply for a mortgage
- Secure a pre-approval from your lender before you go shopping for a property
- Ask the seller or real estate agent whether they need to allow access to the property for a valuation and when they can do so
Beyond these steps, you can also speak with a mortgage broker at the start of the process. They will ask for the relevant documents from you upfront, complete the application over the phone and find the right lender for your situation. They will also liaise with you, your lender, the seller’s conveyancer/s, the valuer, and even the real estate agent to ensure that the process runs smoothly. Because they write many loans with many lenders, they can even escalate your application so it gets processed faster.
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