Buying a home is a significant investment that requires careful planning and consideration. Before embarking on your house hunting journey, it’s a solid move to obtain pre-approval for a home loan. In this article, we’ll discuss the importance of pre-approval and why it’s a key step in the homebuying process.
What is a pre-approval?
Pre-approval is a process where a lender evaluates your financial status and determines how much money they are willing to lend you for a mortgage. This process includes a review of your credit score, income, debt-to-income ratio, and other financial information. With pre-approval, you’ll know precisely how much money you can afford to borrow and how much house you can afford.
The importance of pre-approval
Pre-approval is of high importance for several reasons. Firstly, it helps you set realistic expectations and budget for your home purchase. With a pre-approval, you’ll know precisely how much money you can spend on your new home, which can help you narrow down your search to homes that fit your budget. This can save you time and money in the long run by avoiding looking at homes that are out of your price range.
Secondly, pre-approval can speed up the homebuying process. When you find a home you want to purchase, you’ll be able to move quickly with pre-approval in hand. This can make your offer more attractive to sellers, as they’ll see that you are a serious and qualified buyer who can close the deal quickly.
How to get pre-approval
To get pre-approved, you’ll need to provide your lender with a range of financial information, including your credit score, income, debt-to-income ratio, and employment history. You may also need to provide documentation, such as tax returns, pay slips, bank statements, and other financial information. Once you’ve provided this information, your lender will review it and determine how much money they are willing to lend you for your home loan.
An application for a fully assessed pre-approval requires a few things because the lender is doing a full-assessment upfront to determine how much they would be prepared to lend to you. You’ll need to provide:
- Pre-approval application form
- Proof of ID
- Evidence of employment and income
- Proof of savings (your deposit)
- Details of any current debts/liabilities (like credit cards) and assets (like other properties)
- Credit Report
It’s important to note that pre-approval is not a guarantee that the loan will be offered. It’s simply an indication of how much money you can afford to borrow and the initial interest rate. Once you find a home you want to purchase, you’ll still need to go through the full credit application process, which includes a more detailed review of your financial status and the property you want to purchase.
How long does my pre-approval last for?
Most pre-approvals are valid for around 90 days, although there are a few lenders who offer slightly longer expiration dates up to 6 months. Make sure you’re serious and ready to purchase a property when you apply for your pre-approval so you don’t have to keep getting it rolled over every 90 days (requiring more paperwork).
I heard pre-approvals aren’t always fully assessed and my loan may not be approved.
Correct. There are two types of pre-approval: full assessment and system generated.
Those that are system generated are by definition not fully assessed. A credit assessor won’t review your financials, identification or proof of employment and will generally have a lot of more conditions that need to be met. They are usually issued quite quickly, sometimes even on the spot.
In comparison, a fully assessed pre-approval will require you to provide a lot more information and will be reviewed by a credit assessor and possibly even the lenders mortgage insurer depending on the LVR (loan to value ratio).
A fully assessed pre-approval will also involve a credit check, so bear in mind this can impact your credit rating in the future. You probably don’t want to go and get pre-approvals with every lender in town.
These pre-approvals can take a few days to be approved and will usually have a lot less conditions in place for it to be converted to an approved loan.
One big thing to keep in mind is this: if your employment or financial situation changes then the pre-approval will no longer be valid. We would not recommend you change jobs before you buy your house and apply for your new loan.
A final word on pre-approvals
Lenders change their policy all the time. This means one day they may be very open to investor loans and the next they may decide to withdraw from that market and make it harder or more expensive for investors to get loans. If this happens, your pre-approval may no longer be valid and you may need to apply for it be re-approved.
Apply for your pre-approval with Entourage today, we’ll compare a range of different lenders and loan options, meaning you can bid or negotiate with confidence.
Next steps to take
Obtaining pre-approval before starting your house hunting journey is a key first step in the homebuying process. It can help you set realistic expectations, budget for your purchase, and speed up the homebuying process. If you’re considering buying a home, it’s important to obtain pre-approval. A qualified mortgage broker can guide you through the process and help you find the right mortgage loan for your needs.