House hunting is an exciting part of the property journey for any home buyer or investor - except when it comes to financing! Securing a home loan pre-approval can come in handy when you need to start making offers on potential properties and boost your credibility as a serious buyer.
If you're not sure how home loan pre-approvals work and what it all means, then this article is for you. Let’s start with the basics.
What is a pre approval home loan?
A home loan pre approval, (also known as conditional approval or mortgage pre approval) is essentially a confirmation from your financial lender that says you can borrow money (up to a specified amount) when you’re ready to make a purchase.
Keep in mind that this confirmation is only conditional approval and your lender has not finalised your loan just yet - this means they could still decline your final application.
Using the services of a mortgage broker can help speed up the process by allowing them to handle the paperwork and necessary follow-ups.
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How does home loan pre approval work?
Here’s everything you need to know about how the process should go:
Step 1: Review your current finances
Before you go ahead and apply for a pre-approval, you may want to do a self-review of your current financials. If you have a financier who works with you on your investment property portfolio, they will be in an ideal place to help you out. You should consider your income, your usual household expenses, what assets you currently own and how much you owe.
You should also calculate any ongoing repayments, returns and losses from any other investments. This will give you a fairly good idea about how much you may be eligible to borrow, along with how much you can comfortably afford in terms of repayments.
Step 2: Compare and research on the different home loan types
Once the financial review is complete, you should look into the various types of home loans that are available, along with the features that each one offers. For example, you can think about the loans in terms of fixed vs. variable, or offset vs. redraw. This will allow you to decide which type works best for your needs. Compare the different versions of the loans being offered by different lenders, so that you stand a chance to secure the best deal.
Step 3: Fill in your pre approval form with a lender
After completing all the reviews and research, and settling on the specific lender that you would like to go ahead with, apply to your bank for the pre approval. Most banks allow you to make the application online or over the phone. The application that you file will require certain basic personal information to verify your identity in the initial stages.
While considering your application, the lender will evaluate you based on several criteria which may include the following.
- Your credit history/report/score, from which they will be able to get a credit rating (a numerical value) that indicates your ability to pay back a loan on time.
- A complete run-through of your financial status (assets, liabilities, income and debt).
- The loan amount that you are applying for and whether or not it suits your circumstances.
Step 4: Loan pre approval or denial
After due diligence the lender will come back to you with whether they are offering you the pre approval or whether they are going to deny the request. Remember, being granted pre approval does not always mean that you will be granted the loan when it is time to make the purchase.
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What are the benefits of pre approval for investors?
Faster processing time and disbursals
Your lender has, at this point, already verified your loan eligibility and repayment capacity, which makes the way forward much less complicated. They now only need to validate the finalised property documentation and any other pending legal issues during the disbursement of the sanctioned amount. This kind of quick processing is important to an investor, especially when a deal has a limited window of opportunity.
Better bargaining position for investors
You will have a better bargaining position as an investor with a pre approval - because you will know exactly how much you can spend. You will also know what your repayments are and will be in an optimal position to compare those to other comparable rents in the area. All of this means that you have the chance to get a better deal, especially because the builder or the seller also knows that you have the necessary funds and are serious about your offer.
On the other hand, if a lending institution has pre approved your home loan, this is a great indicator that your creditworthiness is high. With a low debt-to-income ratio and an excellent credit score, you can certainly negotiate better interest rates and repayment terms too.
Saves time, saves money
You will benefit from a well focused home search, therefore not wasting precious time. To any investor, time is money, and every second spent on something that will eventually not work out is financial loss. There is no lack of options in the housing market, be it villas, apartments, bungalows, flats or standalone homes.
With a pre approved loan, you are more aware of your loan eligibility and your purchasing budget in advance. This allows you to focus on finding the right properties that fit within your best budget.
Almost no impact on your immediate finances
Home loan pre approval does not cost you anything. Any fees that may be associated with it are typically paid off once your loan has been settled. Therefore, this has no impact on your immediate budget.
So, is pre approval worth it?
Based on the many advantages that home loan pre approval offers you as a home buyer, we would definitely say that this is worth it. Even though the process of gathering documentation and waiting for the final verdict may get on your nerves a tad bit, if you succeed at obtaining the pre approval, you may stand a better chance of making your dream of a home come true.
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Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your accountant, specific to your situation.