Five things to know about loan pre-approvals

By Nina Cuturic

A loan pre-approval ideally gets you ahead of other interested buyers, gives you confidence throughout the buying process, and helps push down the accelerator on the formal loan application process – when the time comes to it.

Whilst it doesn’t set everything in stone, a loan pre-approval will give you a relatively secure idea of how much a lender is willing to loan you based on your income, credit history and living expenses, as well as a guide on how much interest you will pay per annum, and how much your loan repayments will be.

According to Mortgage Choice Sydney CBD principal and owner Paul Pappas, a pre-approval “means you have a firm budget in mind when you’re out there looking for the property you want to buy. It also puts you in a better position to negotiate on price, and is essential if you’re thinking about buying at auction”.

Although it’s a straightforward process – filling in the blanks of a form, providing the requested documentation, and submitting this application to the lender – Pappas recommends the advice of a mortgage broker to “ensure that the maximum purchase price and borrowing potential are reached, as well as ensuring that a competitive home loan deal is eventually raised”.

“A good and experienced broker can assist customers through the entire purchasing process that is often a complete maze to first time buyers.”

Here are 5 other things to know about loan pre-approvals, all of which can help you get ahead of the game

1. There are two types of pre-approvals
Some lenders perform a system generated assessment, which can provide near to instant results, but this usually doesn’t factor in all the necessary documents or points of investigation. Since these will all be included in the formal approval process, the borrower could be given false hope when handed their pre-approval result. This can be of great hindrance, considering the borrower will use their pre-approval to scope out properties that align with what they anticipate to formally borrow.

In saying this, it’s best to be a little patient and wait for a full assessment to reach your inbox, which ensures that the lender has done a more thorough check of your eligibility. Even in this instance, make sure that the lender has considered your full income and credit standing, not just one of them. The aim is to get the most accurate idea of how many digits the formal approval will eventually entail, although it can still vary.

2. Making too many pre-approval requests can harm the end result
Don’t go fishing for multiple pre-approvals in the hope of comparing what each lender pitches back. It’s known to potentially impact your credit file as every single application is entered onto your credit history.

Today, lenders are now able to see a broader scope of information concerning your file, and a number of loan applications could imply to a lender that you are desperate for finance, or experiencing financial problems.

Most lenders will respond well to seeing up to two credit investigations against your name, but always try to apply through the lender you are most likely to team with for the formal loan approval.

3. They do have an expiration date
Pre-approvals, once issued, most commonly last between 3-6 months. When scoping the market or discussing figures with sellers, be aware of the window of opportunity provided to do this. Always ask your lender the expiry date of their pre-approval, and the process you should expect once it expires.

4. Your pre-approval is in the hands of your circumstances
Never forget that your income, credit history and living expenses determine your pre-approval, so if these change even in the slightest during the life of the pre-approval, the amount the bank initially estimated may also change.

If your circumstances experience a shift, it’s best to get a re-assessment to ensure you are approaching the market with as much confidence and security as possible.

5. The changing market will always have its way
With any loan a lender issues, it will be greatly influenced by what the market is doing at each given time. If the lender happened to pre-approve you for the maximum amount you hoped for, changes in interest rates could lower this figure once you seek to formalise the loan.

There still exists differing views on the benefits of a pre-approval; while on one hand it demonstrates to a seller that a buyer is serious and financially prepared, on the other hand, it is always subject to change, so it doesn’t give a completely reliable indication of what the borrower will be formally approved to borrow. Having a clearer understanding of what a pre-approval entails can create both clarity and confidence when property shopping, so preapproval is ultimately worth seeking out.

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