Article by Valeriya Kamenetska
The ins and outs of buying a house can be a confusing process, but applying for a home loan does not have to be. Understanding the application process you need to undertake when applying for a home loan will hopefully lessen any disappointment or misunderstanding when you find the property you like and want to put in an offer.
When shopping for a home loan, it can seem there are plenty of lenders out there willing to give you a pre-approval. Many first time buyers don’t realise when a lender has ‘pre-approved’ you for a home loan they are not necessarily guaranteeing they will lend you the money to buy that property you have your eye on.
Read on to find out more about the difference between what it means to have pre-approval for a home loan and to have a fully approved home loan.
What is a pre-approved loan and why should you seek one
When you start out shopping for a property, seeking a home loan pre-approval from your preferred lender/s is a good idea. It establishes the maximum amount of money a lender would be willing to loan you. Knowing your estimated buying power automatically helps you narrow down your search to options falling within your pre-approved price range.
Home loan approval is conditional on two things a) that you can service the loan b) that the bank is happy to lend you the money for the particular property you would like to buy.
Pre-approval, therefore, is an indication that the bank is satisfied you could in theory service a loan up-to-the pre-approved amount. In order to get approval, you’ll need to find the property you want. When you sign a contract, your application is fully assessed by all the necessary parties to ascertain approval for the loan. Full approval is final, and is given to you once all the documentation necessary has been assessed and processed. This is why most contracts of sale contain a clause in them that states the sale is conditional on finance. If the loan is denied, the contract falls through.
Home loan pre-approval assessment
Many lenders nowadays advertised extremely fast pre-approvals as a marketing ploy. Realistically, these pre-approvals are only as fast as they are unreliable. This is because they are system generated.
Full-assessment pre-approvals that are more thorough can take up to five days. These are much more reliable than the system generated pre-approvals and are considered what many lenders call a “conditional offer”. Even full-assessment pre-approvals are still missing the review and approval of the lender’s credit department and mortgage insurer. Remember nothing is guaranteed until you get that letter of approval.
Reasons for denial
As discussed, once you have the pre-approval and found the property you want to purchase, you will need to apply for the fully approved, unconditional loan. Many things can change between getting pre-approval and approval, which can result in the lender denying approval. Below are some of the more common things that may result a loan application being denied.
Change in income or unemployment. Alternatively, this includes emergency expenses, change in credit score, and new loans.
Negative property valuation and assessment. The property must meet certain lender’s requirements prior to its approval.
Change in government regulations.
Change in lender’s regulations and protocol.
Change in interest rates can change the amount you were originally approved for.
Expecting or having children affects the calculation of your expected expenses, and therefore can also negatively affect your approval.
Any previously undisclosed information that is related to your financial circumstances
Lenders Mortgage Insurer’s (LMI) guidelines may be different to your lender and they may deny your application.
Tips: convert your home loan pre-approval into full-approval
Do not apply to too many home-loan pre-approvals as they can negatively affect your credit score.
Pre-approvals usually last between 3 to 6 months, so make sure you are only applying once you are ready to purchase.
Try not to change jobs, acquire new credit cards, or have high expenses once you have been pre-approved. This includes tapping into your savings.
Bidding in an Auction? Make sure you acquire full approval prior to placing a bid on a property. This includes pre-auction offers. In fact, many auctions will only allow you to bid once they ensure your financing is fully approved for the necessary amount. If you are looking to purchase a property at auction make sure you give your broker a heads up ASAP, so that they can organise approval PRIOR to you placing a bid. This will save you a lot of stress.
Are you a first-time buyer thinking of buying a property off-the-plan?
Whether you are just looking or ready to buy, iBuyNew can help you choose the perfect property for your needs, whether that be a house and land package, townhouse or apartment. We can help you through each step of your buying journey. Contact us by phone on 1300 123 463 or email on firstname.lastname@example.org and let's start a conversation.