Take some of the guess work and uncertainty out of your property purchase and apply for a pre-approval before you begin your search.
A conditional pre-approved loan can help you make sure you don’t miss out
on your dream property.
What is a conditional (pre-approved) loan?
The first thing you need to know is that there are a few different terms for a Pre-Approved loan, which are: 1. Pre-Approval 2. AIP (Approval-In-Principle) and 3. Conditional Approval. Different lenders use different terminologies, and as your broker we like to keep you on your toes by using all three!
What is a Pre-Approval? If you walk into a (bank) branch and are printed a Pre-Approval on the spot or even the same day, usually this won’t be worth the paper it’s written on. This is called a System Pre (or Conditional) Approval – the Conditions being that a credit assessor still needs to look at your application and verify everything including credit checks, employment checks, and verification of all supporting documents still need to be done. This is a waste of your time and if you were to bid at auction using one of these, you could be putting yourself in a risky position. Unfortunately, more and more lenders seem to be going down this path and only offering System Pre-Approvals*
The type of Pre-Approval you’re looking for is a “Conditional Approval, subject to the Contract + valuation”. This would include a full loan submission and depending on your lenders current turn around times, will take 2-10 business days to obtain. This means that a credit assessor has reviewed your application thoroughly, has gone through all of your supporting documentation (payslips, tax returns, PAYG summary, bank statements, rental statements – the whole shebang), has conducted employment checks, has checked your Equifax credit report, double checked serviceability requirements and is happy with absolutely all aspects of your application. At this point the only 2 things left for the bank to verify are:
- Contract of Sale (which you can only get once you’ve found the property), and
- the valuation (which can only be done after you have purchased the property).
In a nutshell, the credit assessor will take a look at your financial situation, the price range of properties you’re looking at, and the location of where you’re looking to buy, and give you the nod that you’re eligible to apply for a home loan up to a certain limit. You don’t have to take the loan and at this stage the lender is still under no obligation to lend you that amount, but it will show sellers that you’re serious about buying and that you’re confident you can afford the property.
*The reason more and more lenders are going down this path is to cut costs. Given all of the government involvement and recommendations over the past 5 years, a loan approval these days takes about 4 x the amount of time and effort (by your broker and the lender), so lenders need to find a way to cut costs, hence issuing System Pre-Approvals (no human effort on the lenders part).
Do I need to have my loan pre-approved?
No, you don’t! If you’ve already found the home you want to buy you can then go ahead and apply for a loan … BUT there are some very good reasons why you should get your loan sorted beforehand.
Some lenders provide a loan pre-approval which is approved for a certain time (usually three months), and providing your circumstances don’t change you will:
- know exactly how much you can afford to pay for a property
- have the freedom to make an offer on a property knowing that your finance is already organised
- have a better idea of what properties to look for, because you won’t waste time looking for something outside your price range, and
- be able to focus on the purchase (once you find the right property) rather than having to sort out the finance at the same time
With a pre-approved loan, there are fewer chances of hiccups with the sale process, and in some cases, vendors (sellers) will accept an offer below list price and take the property off the market with confidence knowing the buyer is serious.
If you decide to make an offer you’ll be in a position to move quickly if your finance is sorted – this will help you avoid being gazumped, and you can bid with certainty at auction*.
*If you are considering bidding at auction, MTM strongly recommends that you apply for a Pre Approval as auction purchases are “unconditional”, i.e. there is no finance clause. If you bid and win, you must settle on the property. If for whatever reason you can’t settle, you may be liable for huge penalties.
There are hundreds of different loans out there in the mortgage marketplace. But basically, they are all based on three key things:
- Principal – the amount of money you borrow
- Interest – how much you pay to borrow the money. It’s calculated on the outstanding principal
- Serviceability – your borrowing capacity, i.e. what the lender deems you can afford
From here, there is a wide variety of loan features and structures to choose from, and it’s worth knowing what’s involved with each to make an informed decision.