As a first-time home buyer, the pricing of houses can be intimidating. To overcome your fear of house pricing, one tool you can use is a loan pre-approval. This is provided by lenders and gives you an upper limit on what you would most likely be approved for when applying for a mortgage. With this knowledge, homes that you can’t afford can be immediately ruled out, alleviating the stress of missing out on a home that you think you may be able to afford. If you have pre-approval you should be aware that this isn’t the same as a loan approval. Understanding this at the outset can save you from disappointment.
How do you get pre-approval?
Lenders will have an application process that will involve looking at what you earn, your debts and expenses and your savings. Based on current market conditions they’ll determine how much they would be willing to lend you. You can then use this to guide the search for your home. There is usually a time limitation of 3-6 months on pre-approvals.
As well as knowing your price range, a pre-approval can make you more attractive to selling agents as having pre-approval can expedite the mortgage process and in turn their sale.
A mortgage pre-approval is conditional, it is not a guarantee of finance from the lender. A lender is not under any obligation to give you a mortgage just because they have given you pre-approval and its just an indication of the amount you can borrow.
You will still have to apply for a home loan.
The good news is that it shouldn’t take as long. The bank has already got a lot of your information from the pre-approval process. The lender will, however, have to confirm more information and process the application based on the market at that time. This can sometimes mean that, while you have been pre-approved, you can be unsuccessful in your mortgage application.
What can change?
There may be a few reasons that, even though you have pre-approval, you might not get approved for a home loan:
- • Interest rates. Your pre-approval would have been processed with the interest rates of the day. If rates have increased this would change your repayment amount and that may now be more than the lender deems you can afford.
• Loan Policies. Lenders will have policies attached to loans. These policies may change, and this can affect your eligibility.
• The property. Some lenders may not approve mortgages for certain properties. It’s a good idea to discuss this at the pre-approval point.
• Your circumstances. Just as interest rate changes can affect your mortgage, so too can a change in your income, debt or savings. Things like additional credit cards can change your application outcome.
• Lenders Mortgage Insurance (LMI). If you have a deposit that is less than 20% you will require LMI for your loan. The LMI is provided by another business and is not involved in the pre-approval process. While the lender may approve you, the LMI provider may not.
• Government grants. First home buyers may have access to first home buyer grants. The government s that provide these (usually state government) will review these from time to time and can change them.
This doesn’t make pre-approval useless. If you stay abreast of the banks’ conditions and interest rates, you can be prepared for changes. You also don’t have to spend the pre-approval value. If you set the top of your budget below what the lender says they will loan you, you will have a better chance of final approval, even if interest rates rise or your circumstances change a little.
As with any major purchase, the more information you have the better your decision making will be. Loan pre-approval is a great piece of information to have and if you are better informed about how to use it and not just assume that you will get a loan, it can help you find your home.
If you need any help understanding property purchases, contact us and talk to one of our property law experts.