Getting a pre-approval is a great feeling. As a home buyer it gives you re-assurance that a lender has looked at your application and has given you the green light that they will give you the finance you are asking for. However, this is not often the case. All pre-approvals will carry conditions that need to be met when you look to get your formal approval. Lets look at a few of these conditions.
- Satisfactory valuation
Lenders will want a valuation of the property completed to make sure that you haven’t overpaid for your property. Typically the valuation comes back at the contract price, on the basis that if someone has paid a certain amount of money for a property then there should be a market for it. However, a valuer can place a valuation under the contract price if they think you overpaid for the property, the property will take more than 6 months to sell at the price you paid or if there are any issues with the property. In which case, the lender will consider the valuation price as opposed to the contract price. This isn’t a big issues if you have a healthy deposit, however, for those without a healthy deposit, you will be left scrambling to come up with the difference between the contract price and valuation price as lenders typically lend to the valuation price.
2. Your circumstance has changed
One of the typically conditionals is that your circumstances have not changed. Pre-approvals, being valid for 90 days typically, provide plenty of time for someone to change jobs, get a new credit card or change any other part of their financial situation. When you go for a formal approval once you have a home, the lender will want to reconfirm that your financial circumstances has not changed. If they have then your application will need to be re-assessed and may be declined.
3. You only receive a computerised pre-approval
Some lenders have technology whereby a computer can determine if you meet a lender’s policy & criteria and give you an instant pre-approval or decline based almost instantaneously. This sounds great being able to be pre-approved so quickly. However, there are many flaws with a system like this. The system relies on accurate data being entered into the system by your broker. A simple mistake can give you a pre-approval, but when you go for a formal approval a human may identify the error made in the computer and decline your application.
For complex applications we ALWAYS recommend a fully assessed pre-approval.
There are many reasons why a pre-approval doesn’t go ahead. If you have a complex application getting a fully assessed pre-approval where an assessor reviews your application is something we always recommend. This is especially important if you are planning to go to auction as, in an auction, if your bid is successful you must complete the transaction or forfeit your deposit.
Adding a finance clause (only possible in sales without auction) is a good way to have a backup incase your finance doesn’t go ahead. With a finance clause, if you are unsuccessful in getting finance for your property within the set time, you can withdraw from the contract of sale with minimal penalties if any. This is a simple extra layer of security you can add.
Without a formal approval in writing, a lender has not guaranteed you finance to purchase your property.
In short, getting a pre-approval is always a good idea with any home purchase. However, it is important to note it doesn’t guarantee a formal approval. If you’re unsure where you stand, reach out to a mortgage broker who can guide you.
