This is probably a topic that I never saw myself writing about. However, with how often it comes up on a day to day basis, and the different schools of thought on the topic. I thought that it would be a good Idea to write a piece about whether a person should go through the effort of getting pre-approval before going house hunting.
So, what is Pre-approval for those who are new to a mortgage and finance? Pre-approval is where you submit a finance application to a lender, before you have bought a home or entered into a contract to purchase. Pre-approval is the bank saying in layman’s terms that we have had a look at you, and your current financial situation, and we are going to back you with a loan up to “x” amount. This would normally be a conditional finance approval. The conditions that normally need to be met for it to go unconditional are that your financial situation has not changed since you originally submitted your application, and more importantly that the property(security) that you have picked meets the banks standards as an acceptable security.
I normally come up with two main scenarios’ with borrowers with regards to this. The first is your seasoned property owner or investor who has set up finance many a time and bought many properties. Sometimes what happens here is that because they have been so successful in the past and know that they are financially strong. The clients will put the horse before the cart and sign up a contract of purchase confident that the finance will be no issue. Even before the banking Royal commission, lenders were changing their policies on a monthly basis sometimes, this has only become more frequent in the aftermath of the commission. This will often trip up the most confident applicant because of a small thing that has changed in the way a deal is assessed or minimum requirements that have shifted. I have seen a dream home or two, secured, and then lost because we were tripped up by something new in the regulations of finance. This could have all been avoided just by doing a pre-approval. This would mean that the clients would have come up against the hurdles before the pressure of having a time limit to settlement. So long story short, get the pre-approval done. It may be a pain (I like to think we make it quite pleasant!) but if you need finance it has to be done. What that means is that all that is missing when you do find the property that you love is the signed contract and we should be able to go to unconditional finance.
The other thing that this relieves is the pressure. Going and entering into a contract of sale and agreeing to a 30 day or 60 day settlement with 10 days to got to unconditional finance, without a pre-approval is stressful for the broker. It is doubly so for the clients, who now have a deposit on the line and a lot of uncertainty, whether they are going to get the property and the finance. Clients have told me they have had sleepless weeks because of it. So please have a chat with your local Mortgage broker first and get the finance Pre-Approval set up.
The second scenario are those that are new to the housing market. Here you would think that getting a Pre-Approval is a must. What happens though is that people will often get so excited once they have made the big decision to purchase a property, that they will start surfing the real-estate website and attending openings and find the “property of there dreams”. Now that the emotional attachment is formed to the home, and there “will never be another like it”. Clients will enter into a contract with a subject to finance clause, and again be under immense pressure to secure finance in a timely manner.
Lets pause this here. If these first home or property buyers had taken a week or so to have the chat with a mortgage broker. They would have known if they firstly would be eligible for a loan. It is also good to the apply for Pre-Approval and see what hurdles the lender is going to come up with. We could have then addressed these, or gone back to the drawing board, and addressed the issue over the next few months, if it were a big one. Now let’s fast forward again to where the clients have found the property of there dreams. They have a much better chance now of offering a better price than they originally would have. This is because they can now tell the agent that they are Pre-Approved. The agent and the vendors will now look a lot more seriously at the offer put in front of them. Also if there were another competitor who may have an equal or better offer in but no finance approval , the vendors may still choose the slightly lower offer knowing that the finance is Pre-Approved and they may not have to go to market again because the higher offer fell through.
So, in a nutshell getting Pre-Approval will save clients stress, possibly money and help in secure the property that you actually wanted, first time around. So, if it’s not your local Adelaide Mortgage Broker, then have a chat with your lender and get a Pre-Approval set up. If you would like to discuss this further get in touch with us today.