5 Things You Should Know About Pre-Approval

It’s generally encouraged to have pre-approval before making an offer on a property, but most buyers underestimate how important it is.

New research from Aussie has found that over 65% of property buyers have reported missing out on a property because they did not have pre-approval.

For those who aren’t sure, pre-approval means that a lender or bank has agreed, in principle, to lend you an amount of money towards your property purchase. It’s an indication (not a guarantee) as to how much you can borrow with that lender, and subject to a few conditions, of course.

“Having pre-approval means your lender has assessed your financial position and it allows you to plan your property purchase budget,” Aussie CEO Lending, David Smith, explains.

“It is a conditional offer that essentially indicates how much your lender can lend you and the basic terms of your loan.”

Here are some of the key benefits of having pre-approval, and some things you should consider.

1. Pre-approval gives you confidence about the amount the lender will allow you to borrow

One of the main benefits of pre-approval from a buyer’s perspective is that it gives you a concrete idea of how much a lender is willing to lend you given your current circumstances.

Once you know what you might be able to borrow, you can start looking at potential suburbs you may be able to afford using tools like Aussie’s new Suburb Spotter Map. With Aussie’s research showing that nearly half of Australians (49%) don’t understand the deposit percentage required to buy a property, the map is a handy guide to see what the average deposit amount is in a particular suburb.

You can also bid with greater confidence (or just bid at all!) at auctions, knowing your upper limit with absolute certainty.

“While auction rules differ between states, there is usually no cooling off period at an auction,” Smith states. “Pre-approval gives you a good indication of your upper limit, so you can avoid being the highest bidder on a place you can’t afford.”

2. Pre-approval can give you the upper-hand in the market

Real estate agents and sellers are generally interested to know if a buyer has pre-approval. It offers reassurance there won’t be any delays or hiccups in the purchase process. In other words, it shows you’re a ‘serious contender.’

Therefore, having pre-approval may give you greater negotiating power if you are up against a buyer who doesn’t have it.

“Real estate agents may want to know if you have formal pre-approval prior to accepting your offer to confirm you’re a serious buyer,” Smith says.

“It shows them that you’ve already done much of the groundwork to secure finance and can potentially accelerate the settlement process once your offer has been accepted.”

3. Applying for pre-approval means some of the paperwork is out of the way

The reason pre-approval is a useful exercise is that if your pre-approval is current and you go ahead with that lender, you shouldn’t have to re-do a lot of the paperwork.

Most of the supporting documentation required in the pre-approval application is the same as the documents required for full application.

“By getting your paperwork in order upfront, it will save you valuable time and it will be less stressful when you’ve found your dream home,” says Smith.

Interestingly, Aussie’s Property Buyers’ Report reveals that over half of property buyers (52%) don’t know where to start in obtaining pre-approval.

A good starting point is to chat with a broker about finding lenders or loan options that could suit your needs. An Aussie Broker can also help you prepare and apply for pre-approval on your behalf. They don’t charge you a fee for the service they provide –  they are paid by the lender when you take out your loan.

When it comes to applying for pre-approval, the lender will assess aspects of your finances, including your credit history, your savings, your employment situation and any other information to ascertain what you can reasonably pay off.

Then, when locking in that loan, the lender shouldn’t need to do as much of the legwork in assessing your suitability.

4. Pre-approval isn’t a guarantee

Another name for pre-approval is ‘conditional approval’ ­–  which better explains that pre-approval isn’t set in stone. While pre-approval can certainly give you a more reliable idea of what you can borrow, it isn’t a guarantee that you will get the loan.

A number of things can change in the time between getting pre-approval and finding the property you want to buy.

For one thing, the lender still needs to assess the value of the home you intend to purchase, once you find it. So, if for example you’ve received pre-approval on the notion you’re buying a newly-built, two-bedroom townhouse in one area, then you decide you want to buy a studio apartment in another area – this is likely to change the conditions of your pre-approval.

Alternatively, your personal financial situation may change. For instance, if you’ve become unemployed, switched jobs, taken on a new credit card or had a large emergency expense that has chipped into your deposit, you will likely need to re-apply.

5. Pre-approval doesn’t last forever

Pre-approvals are generally limited to a timeframe, which varies from lender to lender. Typically they are valid for around 90 days. This means if you don’t find a property during this timeframe, you will have to re-apply.

The lender will reassess your pre-approval application again to ensure your financial situation hasn’t changed.

The bottom line: pre-work matters

At the end of the day, putting in the groundwork to get pre-approval can be worth the time.

“In times where the property market is hot and competition is fierce, the pre-work that goes into purchasing a property is invaluable,” says Smith. “Having an expert by your side to help inform and prepare you with the process can play a huge difference.”

“There are many steps in the home loan process and an Aussie Broker will help you from your initial steps, such as getting pre-approval right through to settlement.”

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