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Home loan pre-approval—is it worth having?

If you’re considering buying a new home or an investment property, it is worthwhile discussing your options with a mortgage broker before you start your property search.  Getting an up-front approval may save you time and frustration down the track.

Pre-approval advantages

If you have your heart set on a particular property, it helps to know if you will be able to afford it. The most common advantages of a home loan pre-approval are:

  • You understand your financial situation. A home loan pre-approval gives a clearer picture of your financial situation before you commit to buying a property.
  • Credit rating checks can be done in advance. A credit check flags any problems with your credit rating, which may be fixed before you apply for your final home loan.
  • You know your borrowing capacity. This often gives you leverage to negotiate with sellers or during an auction.
  • You can bid with confidence at auctions.  Knowing your pre-approval amount means you know how high you can bid. Knowing your upper limit will prevent you from overcommitting and putting yourself in a difficult financial position.
  • Take your time to find a property. Pre-approval is usually valid for 3 to 6 months from the time of approval. Hopefully, this enough time to find a suitable property. But, if you haven’t found a property after this time, you’ll need to re-apply for another pre-approval.
  • Makes the final home loan approval easier. The final home loan process is often simpler and faster if you have a home loan pre-approval in place. This is because many of the preliminary financial checks have been carried out and your broker can spring into action immediately.
  • It’s free. Home loan pre-approvals usually don’t come with any fees attached. The only time you pay for a home loan application is when you are officially lodging a home loan contract with a specific lender.

What to do after you’ve been granted pre-approval

If you’ve been granted home loan pre-approval, there are some important things to remember to do:

  • Make any contract you sign “subject to finance”. A pre-approval is not a guarantee, and final home loan approval hasn’t been granted by the lender.  Making sure you have a “subject to finance” clause in your property contract gives you a “get out” clause if you there are any issues with the final approval.
  • Notify your lender or mortgage broker of any changes to your financial situation during the  pre-approval stage. If income fluctuates, you make a major purchase, or lose income, you need to advise your broker or lender.  Failure to disclose changes could put you under financial stress later. Disclosing changes allows lenders and mortgage brokers to recalculate your borrowing capacity—and that can work in your favour if you’re earning more!

Finally, remember that an investment or home loan pre-approval is not a guarantee of finance. It’s an excellent guide to use when house hunting and it will help your broker more quickly arrange finance for you when a contract is signed.

To talk about investment or home loan pre-approval for your next property, give Derek Haas a call or shoot him an email.

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