Pre-Approved Loans Explained

Not being prepared financially is one of the most common mistakes a buyer can make when house hunting, and, if competition is fierce, it can really affect the outcome.

Ultimately, the market dictates what will happen and if you aren’t fully prepared you could miss out completely. The best approach is to do your research, know what kind of property you are looking for and how much you have to spend and then get yourself a glorious little thing called a pre-approved loan.

A pre-approved loan can make the world of difference to what can otherwise be a very stressful and emotional situation. A pre-approved loan means you can confidently make an offer or bid for a house going to auction, knowing you will have the finance ready to go once the deal is done, rather than being stuck in the awkward position of loan hunting in a rush. If you have clearly and thoroughly outlined your budget and you can demonstrate your capacity to make the repayments, a pre-approved loan puts you in a much better position to secure your next home.

What is a pre-approved loan?

A pre-approved loan is confirmation from a bank or lending institution that you have applied to them for finance, they have assessed your eligibility based on their lending criteria, and they have approved you in principal as a new home loan client. Generally, pre-approvals have a validity period that could be 3 months or more, meaning you have to lodge the loan application within a specific period of time (for example 3 to 6 months, depending on the lender), however the pre-approval does not represent a binding agreement. If you change your mind about buying a property you can let the pre-approval lapse and try again next time.

Pre-approval is the lowest risk and most obligation free option. There is also conditional approval, which assesses your situation and offers approval, on the condition that certain criteria are filled, in the event of the loan application being submitted. These conditions can relate to the value of the property you eventually choose, or to the lender requiring more details about your financial circumstances, in the event that you lodge an application for the loan, amongst other things. There is also unconditional approval which has more specifics attached, such as the amount to be loaned and generally refers to a specific property.

Where can I get a pre-approved loan?

If you have a good relationship with your bank and have been with them for many years then it’s time to cash in on that loyalty and speak with them about a pre-approved loan. Have a look around their website first to see what kind of home loan products they offer and familiarise yourself with their pre-approved loan options. Most of them will have some kind of borrowing calculator that will help you calculate your potential loan amount, which you can then use as a reference point for your loan application. You can then look over what they’d like to see in your application, check in on your budget, maybe check your credit history with Credit Savvy or Get Credit Score and start to get the information together so you can apply.

In addition to that, you should definitely shop around and talk to other banks, money lenders or mortgage brokers so you can weigh up your options. Maybe you’ll even have something to bargain with if your bank decides to play hard ball. There are a number of reputable mortgage brokers that have lots of useful information on their websites and offer a good range of home lending options, including the varying levels of approval as outlined above. Try Aussie Home Loans, iconnect Financial, or echoice for starters.

Benefits of Pre-approved loans at auction

A pre-approved loan is a great thing to have when searching for a property, but on auction day, not having one could be a deal breaker. The great advantage of a pre-approved loan at auction is the freedom you have to then bid within your known price range. The question about whether you’re making an offer too quickly is resolved if you already have finance in place and it means you’ll avoid a very awkward and challenging situation when it comes to signing the contract after the auction. By securing pre-approval before auction day – preferably in writing – you put yourself ahead of the competition, who may not have come as well prepared as you. Sometimes potential buyers will pull out as the bidding gets high, purely because the anxiety about not having secured the finance becomes too much. If you have the pre-approval and you have your eyes on the prize, you can confidently make yourself known to the agent on auction day. Introduce yourself and let them know your loan is pre-approved, then tell them to relax – that the auction is a formality because that house is about to be yours!