If you have ever looked into getting a mortgage, you probably would have heard about Pre-Approval. It is also called Conditional Approval, or Approval in Principal, all have similar meaning. This is possibly one of the most important things to have when you buy real estate in Australia, and should be one of the first things to get done.
So, what exactly is a Pre-Approval?
A Pre-Approval is just as it sounds, an approval from the bank before you buy a property. Normally, you can only get loan approval when you have already committed to a property purchase. Since this is incredibly risky, many banks can provide an early commitment in the form of Pre-Approval which gives you a level of confidence in your loan prospect.
When a bank issues Pre-Approval, they will have checked your numbers and confirmed the exact loan amount that you can borrow. As soon as you find the right property, they can issue Formal Approval quickly.
Sometimes, there are conditions attached to Pre-Approvals. However, these tend to be minor because the banks would not commit without strong confidence in your finances.
So why have a Pre-Approval, why can’t we just buy a property first and go straight to final loan approval?
Even if you are very stable and conservative with your finances, no one could (or should) guarantee that you will get a loan. Getting a mortgage is so complicated that you need to let the bank look through your situation to know for sure. Therefore, having a Pre-Approval provides several benefits:
You know exactly how much you can borrow, and in turn how much you can buy. This eliminates all guesswork and make budgeting so much clearer.
Any issues with your finances, known to you or not, will be identified and resolved. Getting this done early will prevent a lot of headaches by the time you seek Formal Approval.
You can go house-hunting with confidence that finance is in place. Knowing your exact budget will help you stay focused on which property you can buy. Your offers will also be taken more seriously than those who are not even sure whether they can borrow enough yet.
You can go to Auctions. This should go without saying, but I will not bid on anything without knowing for sure I can afford it.
You are immune to any changes in rates and bank policies for the next 90 days. When rates are so volatile, or if you need to borrow as much as you can, this can be invaluable.
When you find a property, the bank can approve your purchase quickly. Since they already looked at your situation, they don’t need to go through the whole process again, saving you crucial time during cooling-off period.
You can go house-hunting with confidence that finance is in place.
Pre-Approval sounds great! Does that mean we don't have to worry about finance again after this is obtained?
Not exactly. While they can be very useful, there are some important limitations with Pre-Approvals:
The bank may have approved the loan amount, but they can still decline the deal if the property falls within certain restrictions. These restrictions can be lower loan for high-density units, proximity to high-voltage powerline, and so on. Therefore, you need to check each property with your Broker.
While I said before that you are protected from rate change with most banks, some of them do have strict conditions that allow rate change to apply.
Pre-Approvals typically last for 90 days only, after which you will need to update your documents to get them renewed.
Some of the cheapest banks don’t issue Pre-Approvals. They require you to commit to a purchase before going to them.
Increasing the loan, decreasing deposit, or changing your situation could void the Pre-Approval. Always check with your Broker when anything changes to see if they affect your loan.
Now that we have a better understanding of Pre-Approval and what it can do, how do we get one?
Most people talk directly to the bank as their first option. However, I would recommend Mortgage Broker as a great alternative. The process is the same, they organise a first consultation to find out your needs and objectives, then put together an application and send to the bank for processing. Where brokers differ is in choice and convenience.
Mortgage Brokers deal with a large number of banks everyday, so they know where best to get Pre-Approval in each case. They can search for the cheapest banks, find out which one issue Pre-Approval, check whether you fit with that bank, all in the span of a couple of hours. Doing the same yourself would cost you weeks, if not months, and you still cannot be sure that the information you find is accurate and up-to-date. Better yet, the vast majority of Brokers apply for you for free, so there is no risk in trying them out. There are a lot more nuances when it comes to using Broker or doing it yourself, but I will discuss these in another post. For now, I recommend checking out their services at least as a second opinion.
And that’s it, hopefully I have helped you understand what a Pre-Approval is and why you should get one as soon as possible.
If you have any questions that you wish I had covered, do leave them in the comment section and I will do my best to answer them.
Thank you, and until next time, stay sensible.
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