Home Loan Pre-approval Secret
When I bought my first home (as pictured) in Camperdown, Sydney back in 1996, pre-approved loans did not exist. I was successful at auction, paid my deposit and then went to the bank to obtain a loan. I didn’t know if I would get a loan or even the loan amount that I needed. As you might imagine, that was a rather nerve wracking time!
Today, pre-approved loans are common practice and most first home buyers commence their journey on to the property ladder with a loan pre-approval which is a good first step. However, whilst a pre-approved loan gives confidence to buyers about what they can borrow and up to what limit they can spend, a pre-approved loan does not necessarily guarantee that it will convert to a full loan when you purchase. Let me explain why.
When assessing a full loan application, in very basic terms, the bank will assess three things:
Your ability to afford a loan by considering your income and expenses;
How much you will be contributing to the purchase, by looking at your savings history, source of funds; and
The type of property you are purchasing.
For a pre-approved loan application, the bank can only assess the above points 1 & 2, because you have not yet bought a property. Therefore, if the bank is happy that you can afford the loan and are satisfied that you have enough funds to contribute to the purchase, they will grant you with a conditional loan approval, also known as a Pre-approved Loan. The Loan is conditional on you finding a property which is acceptable security to the bank.
What does “acceptable security” mean? Put simply, the property that you purchase must fit with the bank’s lending policy. All banks have different lending policies in relation to income, expenses, other debts, savings, etc and property. For example, some banks prefer to lend against units, some will not lend to a unit block more than 4 stories high, some banks already have too great an interest in one block of units and will not lend at all to that address, some banks will not lend against vacant land.
It is therefore very important, when submitting a pre-approval loan application, that you have thought about what type of property you are planning to purchase so that the application can be placed with the right lender.
You might be thinking, well, is it necessary to have a pre-approved loan in place before I start looking for my first home? It is not mandatory to have a pre-approval before you buy, however the existence of one gives you confidence (to avoid the angst I experienced 21 years ago)!
Apart from providing you with piece of mind that you can get a loan, a pre-approved loan also provides you with:
a clear understanding of how much money the bank is willing to lend you;
you will know your purchase limit which gives you confidence if you have to go to auction and/or negotiate with a real estate agent;
being “ready to go” might also give you an advantage over your fellow buyer competitors; and
a pre-approval also allows you to budget as you will have a good idea of what your loan repayments are likely to be.
If you are looking to purchase your first home and are seeking a pre-approved loan application, call me on 0413 246 820 or email me at emma@emmamcleodfinance.com.au to ensure that we find the right lender that suits both your dream property and that of the bank.
