Why do I need pre-approval for a home loan?
Looking for a new home can be an exciting and challenging experience. Buying a home is one of the largest investments you may ever make.
It’s good to keep a level head and be realistic about what you can afford. Most of us, when buying a home, will need to borrow money to finance the purchase. So before you go any further, you need to find out how much you can borrow.
Your first step should be to speak with a Mortgage Broker to determine how much you can borrow or steps you need to take to be eligible for a home loan. A Mortgage Broker can help with is. Why a Mortgage Broker and not your local bank branch? A Mortgage Broker is like a loan supermarket. They have access to hundreds of different loans while your local bank branch can only offer you their products. Quite often a lender will have monthly specials that are only available through your Mortgage Brokers network.
Once you have selected a Mortgage Broker then call them to arrange a meeting. You can search online for reviews or speak to friends about one they have used.
When applying for a pre-approved loan you will need to provide some additional documentation, such as:
- Proof of deposit – bank statements
- Proof of income – pay slips
- Monthly expenses and other outgoings such as loans, credit cards and store cards
- Provide 100 points of identification
- Last two years taxation returns and Notice of Assessments
- A loan pre-approval can take up to two weeks to obtain. Make sure you have it in writing.
What are the benefits of obtaining a pre-approval loan from your lender?
- It gives you clear guidance on how much money you can spend
- You won’t be setting yourself up for disappointment if you think you can spend more than your lender agrees to lend you
- It allows you to shop with confidence and bid at auctions should your dream home come onto the market
- It shows your estate agent that you are serious about buying a home. Some agents won’t spend their time showing you homes in-case you don’t come through with the financing
What are the conditions of pre-approval?
- That all information supplied to the lender for assessing eligibility is true and correct
- That the lender has received all documentation necessary to verify deposit, security, assets, liabilities and income
- Verification of the personal and financial details
- The lenders satisfactory assessment (including a valuation) of any property offered as security for your client’s loan(s)
- Whether Lenders Mortgage Insurance is required. If it is required (generally when the loan amount is for more than 80% of the value of the security property) the loan will be provided only if the insurer agrees to provide the insurance. The borrower will also need to pay the Lenders Mortgage Insurance premium
Once you’ve found your dream home, you will then need formal approval. A full approval of your loan will require a valuation of the property you have purchased. If the purchase is at an auction or through a licensed real estate agent then this is usually a formality. However, beware when purchasing apartments especially in built up areas as these do not always come up to valuation. Especially if they are under 50sqm.
But before you apply for a pre-approved loan, make sure you are fully aware of the reason why loans are rejected. This way you can ensure you meet the criteria before applying – the last thing you want is lots of different loan applications appearing on your credit report!
What are the common reasons an application would be declined?
- You can’t properly document your income
- Your credit rating is low
- You have too many enquires on your credit file. All your loan applications will appear on your credit report. If there are too many this may you’re your lender nervous as they may think you are not telling the full story
- Your situation has changed, for example you have recently changed jobs or got another type of loan
- The policy of the lender has changed. Some lenders will honour pre-approvals that are lodged before their policy changes
- Interest rates have increased; this as a consequence that the maximum amount that can be borrowed will decrease
- If your loan amount is more than 80% of the property value
When preparing to meet your Mortgage Broker make sure you have all your paperwork organised to ensure they can provide an answer as soon as possible.