[3 min Wed finance tips series] What is home loan pre-approval and why are we doing it?

For those getting ready to stride into the world of home ownership, the uncertainties of pre-approval can cast a shadow of doubt over an otherwise exciting time. When is it necessary? How long does it last? And what does it involve, exactly?

Pre-approval is a lender’s assessment of your likelihood of being approved for an otherwise suitable loan. The appraisal is made on the basis of your ability to service a loan by looking into your living expenses and liabilities, your credit history, your employment circumstances and how often you have moved home or employment in the recent past.

As it is performed prior to a property being found and chosen, it does not take into account the particulars of a specific property and valuation, which is why uncertainties can arise.

Pre-approval is helpful for those who want to know how much they can borrow before attending open homes, and can be reassuring for new borrowers.

When someone gets pre-approval they can start looking at properties knowing how much they can borrow. They know what their price range is. People take comfort in knowing that a lender has looked at their application to make sure it meets policy.

Pre-approvals are usually valid for up to 90 days but, depending on the lender, may be renewed to allow more time to find a property.

It is very important to note that a pre-approval is not a guaranteed loan. It is your potential lender’s way of signalling how much they expect to lend you. This may change on your official application. Policies are changing day-to-day, week-to-week at the moment. For anybody with a conditional approval, it’s a good idea to speak to their broker to find out if any policies have changed.

Another thing that may cause a lender to decline your loan application after pre-approval is a change to your pre-approval circumstances. Brokers need to make sure the applicant has not gone and got another credit card or car lease, or any other debt that may affect adversely their income and serviceability.

Your pre-approval will also usually be conditional on a property valuation. If your lender does not deem the property a marketable asset, they may not approve a loan. Brokers would want to check that it is a readily sale-able property. That’s the biggest thing. To make sure the actual security itself is acceptable.

Potential lenders need to be wary of the changes that can affect their ability to take out a loan, regardless of pre-approval figures, to ensure they don’t overcommit without a guaranteed source of funding.

Lend Power in general does not recommend pre-approval, however there are times where pre-approval may be beneficial to customers. For example when servicing for customer is really tight or when customers want the peace of mind before attending an auction.

Remember, pre-approval is not a guarantee, but can be a useful tool for anyone looking for a property.

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