A Pre-approval – for any purpose – must be reliable

A pre-approval for purchasing property can be an important step in the process. There are many steps before purchasing a property, from saving for the deposit through to researching interest rates and choosing a neighbourhood. However obtaining a loan pre-approval is one of the most important steps of all.

This process is simple, but it is also critical as a necessity prior to house hunting and negotiation. There is no better way to move forward with confidence than with pre-approval, but it is also important to be aware of its limitations.

Also known as conditional approval or indicative approval, this ‘in principle’ agreement comes without guarantees but with many conditions. A loan pre-approval is an indication from a lender that if all goes well with your formal application, then that lender may approve your loan. To provide this pre-approval, the lender will verify some of your financial information and tell you an expected loan size for you to work with when you look at properties. This may all seem like a waste of time, however pre-approval from a reliable source is the only way to obtain an accurate understanding of your mortgage limits.

The two types of pre-approvals in Australia are full or manual assessment, and system generated or on-the-spot assessment. A full or manual assessment is the reliable way to go. This kind of assessment normally takes several days and requires significant paperwork. In contrast, although they may be available within the hour, system generated or on-the-spot pre-approval is often nothing more than a sales technique. Even though some automated pre-approvals require documentation, proper checks are not carried out.

Despite the conditional nature of the pre-approval process, banks and other lenders do require documentation. Along with a standard 100-point identification check, lenders may carry out a credit check and ask for proof of income, employment, savings, assets, and debt. Reliable pre-approval also involves a background check and the completion of an extensive application form.

As with all business activities, it is crucially important to ask questions. The first question to ask is: Is my pre-approval reliable? After you do your own research or speak with a financial advisor such as Accru, ask your lender your questions. And don’t hold back. Has your application been through a credit check? Has it been approved by the lender’s insurer? What conditions are there that could lead to a decline, or a cancellation, of your application? While a pre-approval is a great first step, your mortgage approval can still be declined if your situation changes, the property doesn’t meet certain conditions, the lender’s insurance company rejects it, or if it expires after waiting the common three or six-month period.

The Australian housing market is extremely diverse and competitive, with pre-approval helping you set a realistic budget, filter your searches, and put your ‘best foot’ forward. If you are pre-approved by your lender for a specific amount, you know you must limit your house hunting to properties under that limit. This process may be sobering, but it provides you with a realistic understanding of how much you can spend. In some instances it helps you to save time. And with a pre-approval, in negotiations potential sellers and agents will be much more likely to see you as a serious buyer.