Pre-Approvals In An Instant.

9 Things you should know about pre-approvals.

Having a pre-approval in place before making an offer on your desired property is highly advisable.  But what is most often misunderstood are the types of pre-approvals available, and their associated quality and level of risk. Here is everything you need to know on the topic.

An experienced property investor will tell you that there are seven steps to arranging a home loan and purchasing a property.  Step one should be to arrange pre-approved funding (more details available at https://newhorizonfinancial.smartonline.com.au/explaining-the-loan-process/).

1) There are several names for pre-approvals: approval in principle, conditional approval, or indicative approval, but these are just names and there is no practical difference to them, however it’s important to understand the types of pre-approval available and level of confidence and risk associated with them.  

2) There are three types of Pre-approvals. For all types you will need to provide personal details such as income, expenses, assets, and liabilities.  The difference is how far up the chain of decision makers your information travels and who is accountable for the decisions made.

  • Advisor Assessed (medium to high confidence) – A Credit Advisor will review your supporting documents such as payslips, tax returns, financials, bank statements, loan statements and your Equifax report, plus suburb data and desktop valuations to work out your borrowing power, provide lender comparisons and point out any potential challenges.  This type of pre-approval can be provided immediately and does not result in any enquiries listed on your credit file.  Serviceability (affordability) calculations are run through state-of-the-art software and results are cross referenced through lender specific calculators to ensure accuracy.   An Advisor assessed pre-approval will not only confirm your maximum borrowing power but will provide insight on timing while highlighting any potential risks.  This type of pre-approval is recommended for clients in the early stages of house hunting and provides adequate certainty to sign a contract and make an offer so long as a common finance cooling off period in place. 

  • Lender System Assessed (medium to high confidence) – Once your Advisor assessed pre-approval has been completed, and a lender has been selected, the next step is to submit your profile and supporting documents to the lender for assessment.  Many lenders use AI technology to provide an instant system approval if the application is acceptable.  This decision is based solely on the information provided by your Advisor which is cross referenced with available online credit reports.  A system approval is valuable as it will likely confirm an Advisors recommendation.  However, supporting documents have not been reviewed by the lender and there is still a small element of risk associated with potential errors in the quality of information provided. This type of pre-Approval is recommended to clients who are close to purchasing a property and have settled on a preferred lender and products.  Many lenders will not offer system pre-approvals but can perform pre-assessment within a couple of days.  It’s important to note that in both cases a credit check will be performed by the lender resulting in an enquiry on your credit file.  Having multiple enquiries is not desirable as they can negatively impact your credit score and are a factor in many lenders decisions when assessing an application.

  • Fully Assessed (high confidence) – Once the application has been submitted and has passed pre-assessment, a lenders credit department will conduct a complete assessment.  Supporting documents are reviewed and a formal decision is made.  This type of pre-approval will often take several days and is advisable when a buyer is seeking to sign a contract with no cooling off period or to purchase a property at an auction.  Having an exact address is required to ensure a lenders certified valuation and evidence of funds to complete (deposit) must be provided.  This type of pre-approval will allow a client to purchase with total confidence, including signing contracts with no finance clause.  However, again it’s important to note that this level of certainty will result in enquiries on your credit file.

3) Advisor Assessed Pre-Approvals can be completed immediately. Your Credit Advisor can learn all they need to know about your circumstances and desired outcomes within a complimentary 20-minute consultation.  Having your supporting documents on hand is helpful (a list of required supporting documents can be found at https://newhorizonfinancial.smartonline.com.au/checklist-of-loan-documents/) and priority assistance (afterhours and weekends) can be offered if timing is critical.

4) Pre-approvals are only valid for a limited time.  For most lenders, a pre-approval will expire within 3-6 months to mitigate for any changes in the property market or clients’ financial circumstances.  Ensure you are aware of the expiry date when house hunting and stay in touch with your Credit Advisor who will update your file and ensure your pre-approval remains current.

5) If there has a been change to your personal circumstances, you may not be formally approved. The following is a list of changes which may impact a lenders decision:

  • A change of employers

  • A decrease in income

  • Taking out a new loan or credit card

  • Changing from full to part time or casual

  • Becoming a contractor

  • Reducing your level of savings/deposit

  • Undisclosed liabilities or expenses being picked up by a lender at full assessment

  • Having an additional child or dependent

Note:  Keep your credit advisor up to date with any chances to your personal circumstances to ensure your selected lenders are appropriate and competitive. Our panel is diverse and can accommodate many “out of the box” scenarios.

6) If the property type is not acceptable by the lender, you may not be formally approved.  The following is a list of types of properties which may not be acceptable:

  • Properties that are under 50sqm

  • Company title properties

  • Leasehold properties

  • Serviced apartments

  • High density properties in inner city areas, particularly where lenders mortgage insurance is involved

  • Rural areas

  • Certain suburbs

  • Hobby farms

  • A property that is in poor condition

  • A property with large power lines close to it

Note:  All lenders have a unique policy when it comes to the above-mentioned types, so it’s important to consult with your Advisor regarding your intentions to ensure an appropriate lender match.

7) If interest rates change, your pre-approval may be affected.  This can be particularly important when you are planning to purchase at your maximum borrowing power.  If rates rise, payments naturally rise accordingly, and your maximum loan amount may decrease. 

Note: Lenders do not assess your ability to repay a loan based on current rates, but instead use their own assessment rates.  These rates are based on inflation rates and are designed to give both the lender and borrower confidence that loan payments can continue to be made without financial hardship. Assessment rates vary from 1.0% - 3.5% above the current variable rate and will impact your maximum borrowing power.  In an environment of changing rates your Advisor will keep you updated with lender options and may suggest switching lenders to ensure your desired borrowing amount is maintained.   

8) Changes to loan to value ratios (LVR) may impact your formal approval.  LVR is a major consideration for lenders both in their pricing strategy and risk assessment.  It’s important to understand the LVR used for your pre-approval and ensure this has been cross referenced against a valuation on your desired property. 

Note: Many lenders will offer free, up-front valuations prior to the submission of an application for unconditional approval and your Credit Advisor can order one immediately following your lender selection.

9) Pre-approvals signal to vendors that you are a serious buyer.  Many Real Estate agents, sellers and developers will be keen to ensure a pre-approval is in place before entertaining offers with many requesting evidence to ensure confidence.  Having a lender poised to proceed to full approval may give you an edge in a competitive market.

Ready to take the next steps? Book a consultation with an NHF Credit Advisor today.  Our advisors are mobile and can provide instant pre-approvals in as little as 20 minutes. 

For urgent enquiries priority assistance can be offered after hours and on weekends.  Get in touch with your local NHF advisor today.