The common misconceptions about Finance Pre-approval
One of the common questions I get asked by First Home Buyers seeking my help is “do we need to do a finance pre-approval? Is it worth getting one??”
Like a lot of things in life – it depends!
We touched on some of the key aspects in our earlier article “What is home loan pre-approval and why are we doing it?“, but I thought it would make sense to outline some of the most common general misconceptions that people have in relation to finance pre-approval below:
1. A finance pre-approval means I already got finance FULLY APPROVED
This is quite a common misconception. It is important to note that a pre-approval is not a FORMAL APPROVAL. A pre-approval is a conditional approval, and after receiving an executed Contract of Sale (COS) it will still be subject to lender’s final verification & assessment before granting Formal Approval.
So it is wise not to waive the finance clause as yet (if you do have one in the contract). Wait till you actually get formal approval from bank or your broker before proceeding.
Also note some lender’s pre-approval are fully automated – which means the application actually doesn’t get assessed at all. I call this a “fake pre-approval” – basically it’s completely system generated and it does minimal check such as credit check only. So keep in mind in this case it may not have even gone through assessment at all! Again check with your broker if you need any further clarifications on this.
2. All pre-approval lasts for 3 months
General consensus is that pre-approval lasts for 3 months however it’s important to note that rule vary for all lenders. Some lenders may allow pre-approval for up to 6 months while some other lenders will require updated payslips every month to continue renewing the pre-approval period. If in doubt, best to check with your lender/mortgage broker before the application stage to confirm the validity of pre-approval period.
Also note for lenders who are giving 6 months validity period, most likely updated payslips and statements will be required at the end of the 3 months period.
3. Pre-approval is ALWAYS required before hunting for a property
Not always. In my opinion there are a number of considerations that could determine whether you should proceed with a pre-approval or not:
1. Serviceability – how much are you passing the finance by? i.e. is it a comfortable pass or a tight pass? You can find this out from your broker/bank
2. Lender turnaround time – does it take a couple of days for the application to be picked up, or does it take 2 weeks before the application will get looked at?
3. Which state are you purchasing the property in? Is there a finance clause on the contract by default like that in VIC/QLD? How many days of cooling off?
4. Whether you are going to an auction or not
These are just a number of factors for you to consider.whether pre-approval is required. Generally if you want to be conservative then a pre-approval will be recommended. However also note there will be a credit hit on your file every time you do a pre-approval, and too many credit hit on the file is not a good thing – hence you would want to maintain a balance.
Which is why having a good mortgage broker on your side will make your property purchase experience very different. Contact us today for an obligation free 15 mins call to see how we can help guide you to decide whether you need a pre-approval or not.