Applying for pre-approval can give you increased negotiating power when it comes to buying property, but make sure you understand how it can affect your credit file if you make multiple applications.
Securing pre-approval not only helps you narrow down your property search by having a conditional approved amount to borrow, it also gives you greater confidence when it comes to bidding or negotiating the sales price. However, be careful about applying for pre-approval with several lenders in a short space of time.
While applying for pre-approval is an important step of the property buying process, be wary of making several applications, as this can be detrimental to your credit file and could harm your chance of qualifying for finance.
Are pre-approvals recorded on my credit file?
Pre-approvals are recorded on your credit file each time you apply. This can have a negative impact on your credit score if you apply for too many home loans in a short amount of time.
When the lender checks your credit score, your pre-approval application will show up as an enquiry. For instance, it will show:
- The enquiry date
- The credit provider
- The credit amount you applied for
- The reason for the enquiry
- The reference number
Lenders up until recently did not know whether applicants had been approved or declined for credit (they couldn't see the outcome of the enquiry). They would just assume that an applicant had been declined, as this would explain why they had applied for multiple pre-approvals.
Today, this information is being slowly collected and displayed in credit files, so this isn’t as much of a problem, but applying for multiple mortgage pre-approvals can still indicate to lenders that you are experiencing financial stress.
As a result, lenders may view you as a high-risk borrower and be reluctant to grant you full loan approval.
What is pre-approval?
Applying for a pre-approval involves visiting a lender and providing information such as bank statements, 100 points of ID, income and asset details, and evidence of savings in return for an estimated borrowing limit to purchase a property.
Pre-approval from a lender effectively sets your limits, allowing you to bid or negotiate with confidence when purchasing property. Pre-approval makes you look like a more serious buyer to real estate agents and lenders, as it indicates that you're ready to enter into a transaction.
Pre-approval can also give you increased negotiating power. The vendor may be willing to accept a lower sale price if you’ve secured finance, especially if they’re looking to sell quickly.
Remember that pre-approval is only an indication that a lender is willing to loan you an amount of money for a property purchase based on its assessment of your financial position. The lender is not obligated to formally approve the loan application.
Pre-approval is typically valid for 3-6 months. After this time, a new application is required to ensure that the pre-approval is up-to-date.
Most lenders will be able to provide pre-approval within 48 hours, although some may take longer depending on whether you have all the necessary documents ready.
How many enquiries is too many?
Most lenders prefer that you have one or two enquiries in a six-month period. Any more than this may be grounds to reject your home loan application.
How long does a credit enquiry stay on my file?
Typically, credit enquiries remain on your file for five years from the date you lodged the enquiry.
How can I improve my chance of being approved for a loan?
Qualifying for a home loan can be difficult, particularly if you’re not a blue-chip borrower or you have several credit enquiries against your name. Here are some ways to increase your chance of being approved.
- Regularly review credit file. You should get into a habit of regularly requesting and reviewing your credit file as this can help you understand your financial position and behaviour. It can also help you realise if you need to take steps to improve your credit rating.
- Minimise existing debt. Be proactive about trimming any existing debt that you have such as credit cards or personal loans. For instance, if you have three credit cards with different providers, you may want to consider consolidating this debt.
- Don’t over-apply. As discussed above, making multiple pre-approval applications can significantly harm your credit position and your ability to qualify for finance. Multiple enquiries are a red flag to lenders, and they will often assume that you’ve been rejected for several loan applications.
- Speak to a broker. An experienced mortgage broker can help you understand your borrowing capacity and the type of home loan that may be suitable for you. They will also help you through the application process to ensure that you aren’t over-applying.
- Apply with specialist lenders. If you’ve made several credit enquiries or pre-approval applications, consider approaching specialist non-bank lenders. They may be more lenient about the fact that you have several enquiries on your file. However, they will want an explanation for each enquiry.
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Rates last updated April 29th, 2017.
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