When you’re house hunting, already having pre-approval for a specified amount can help show vendors that you’re serious.
When you’re going through the home loan process, there are various stages of approval before your home loan actually gets to settlement. This can be fairly confusing, as it can be tough to understand when you’ve actually been approved and can breathe a sigh of relief. In general, your approval for a home loan can go through three stages.
Pre-approval is nothing more than a computer-generated yes or no to let you know if you’re likely to be approved for the amount you’re borrowing. Pre-approval takes into account the financial information you’ve provided to the lender to determine whether or not the amount you’re looking to borrow is suitable.
Pre-approval is in no way binding to either party. Just because a lender has pre-approved you for a certain amount, you are under no obligation to take it. Likewise, a lender is under no obligation to give you a home loan based upon pre-approval. In essence, pre-approval is just giving you and the lender a rough idea of the size of home loan you’re likely to qualify for.
Nevertheless, pre-approval is handy to have.
Pre-approvals provide you with increased negotiating power when it comes time to agree upon a price with the seller. You will be considered a preferred buyer, similar to a cash buyer, and having a lender’s seal of approval in place can help you win a bidding war against others who may not qualify. A pre-approval can also reduce stress by helping to speed up the documentation process once you’ve found a home.
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What do you need for pre-approval?
A completed and signed application form.“The process of getting pre-approved is actually quite simple and is the same as a home loan application process,” Longman explains. You’ll need to provide:
- Evidence of your income such as pay slips and/or tax returns.
- Evidence of your savings such as bank statements.
- Evidence of your current debts such as credit cards, personal loans and home loans.
- Identification documents, eg a driver’s licence
“It also helps to be able to show a savings history and a copy of a budget to show you can manage your finances well and have an idea of how much you want to borrow,” Longman says.
With a pre-approval in place you can then go house hunting armed with the extra negotiating power you have at your disposal. Once you’ve found the house you want at an affordable price, you’ll then need to get formal approval from your lender. This stage involves an interview and will require you to supply similar evidence to that mentioned when applying for pre-approval. Providing in-depth details of your finances, which can include everything from payslips and bank statements to information about any outstanding debts you may have, will help ensure a successful outcome.
Your lender will explain all the fees and charges involved in establishing your loan and answer any questions you may have, before it then comes time to draw up loan documents. You’ll need to read your loan contract carefully before signing, and your lender will check that you’ve filled out everything correctly.
Your conveyancer or solicitor can then review the contract of sale, before you and the seller can sign a copy. Once a settlement date has been arranged, your lender will provide confirmation of your loan details. This is also the time at which you can expect to be charged for stamp duty and registration costs.
Now it’s time to start managing your loan and, most importantly, this is also the time you get the keys to your new home.
Traps and pitfalls
Prospective borrowers should be aware that just because they’ve obtained pre-approval from a lender, this doesn’t mean they are guaranteed a home loan. David Johnson from Noble Financial Services points out that if you fail to meet the conditions a lender or bank attaches to your pre-approval, they will not issue a formal approval.
“Conditions are normally standard like:
- Providing a Contract of Sale (no greater than the pre-approval scenario stated)
- The bank getting a valuation on the property
- The bank and the mortgage insurer being satisfied that the property is suitable (e.g has a kitchen or you did not pay too much)
- That you have not changed jobs halfway through the process”
Sean Longman from Loan Market warns borrowers to be wary of the several different definitions of ‘pre-approval’ used in the mortgage industry. “It’s important you get a formal, written, unconditional pre-approval,” he says.
“For some pre-approvals the lender relies on information provided by the buyer to estimate how much the borrower could qualify for. With a fully assessed unconditional pre-approval, the lender verifies the borrower's information and documentation to determine exactly how much it would be willing to lend to that borrower.”
Finally, make sure your chosen lender takes the time to properly evaluate pre-approval applications rather than simply issuing an automatic approval. “Always make sure your pre-approval application will be fully assessed by the bank; otherwise it isn’t worth the paper it’s written on,” Johnson advises.
Getting pre-approved for a home loan is an important step in the home-buying process. To find out more, or to get an idea of the size of the loan you could be approved for, get in touch with a trusted mortgage broker.
Other types of home loan approval
Conditional approval means a lender has approved your home loan in principle, subject to certain conditions being met. At this stage, a lender has received the documentation supporting your application and has actually assessed your financial position and home loan suitability. They’ve offered to extend you credit, so long as you can meet the conditions of approval.
Some of the stipulations of conditional approval may be that the lender wants to see a valuation of the property you’re intending to buy. They may want to determine whether the value of the property matches the loan-to-value ratio loan-to-value ratio (LVR) and loan size they’ve said they’d be willing to lend you.
A conditional approval may also mean a lender simply wants more documentation about your liabilities and assets. They may require more payslips or an employer’s letter.
If you apply for a home loan and receive notice that you’ve only been given conditional approval, don’t panic. Odds are the lender just wants a bit more information before offering full approval. However, as with pre-approval, neither you or the lender are obligated to proceed with the loan.
Unconditional approval is the final stage of your home loan application before the loan actually reaches settlement. This means the lender has taken all your financial information into account and is willing to offer you a specific amount of money for a specific property.
Again, you are under no obligation to accept the loan at this point. However, unconditional approval is the stage at which you will be sent loan offer documents. Once you’ve signed and returned these, you have agreed to borrow a certain amount of money under certain terms and your loan will move toward settlement.