Preapproval – What is it and do I really need it?

Part 3 – Preapproval

~ Confidence comes from being prepared ~  John Wooden

Buying your first home is such an exciting time and comes with a lot of checks and steps before you can collect the keys and move in.  The team at First Choice Home Loans Qld is here to help you tick off some of those things on that very long to-do list including filling you in on the basics of preapproval, one of the most important steps in the early stages of home buying.  So, keep reading and we’ll fill you in…

Essentially, preapproval is when a lender agrees, in principle, to loan you money towards the purchase of your property without actually having a particular property in mind and it’s not the final and formal request for a loan.  Think of it as an indication, not a guarantee, as to how much you can borrow.

We say it’s an important step but, please know, you don’t need preapproval to buy your first home. However; given you’re new at this and the fact that it comes with so many advantages to help your cause, we and most other financial institutions, strongly recommend it. 

Just to give you a brief idea why, here are some of the advantages of having preapproval:-

  • Sellers will see you as the real deal, ready to buy with financial backing and if they’re looking to sell quickly (which most are) it could give you an advantage over other buyers
  • You know how much you can afford; it will keep your head out of the clouds dreaming about mansions you won’t be able to afford
  • Looking for homes within your budget will also save you a ton of time
  • Buyers confidence is a real thing. Put in an offer on a home without losing sleep and crossing everything hoping you can get the finance to pay for it
  • And, let’s not forget… being preapproved could help speed things up when it comes to applying for the official home loan

If you think your financial situation is a bit dicey, there may be one disadvantage in applying for preapproval… it’s visible on your credit file as a loan enquiry.  Applying once shouldn’t raise any red flags however; several applications in a short space of time won’t shine the best light on you.  So, the best time to apply for preapproval is when you’re seriously considering purchasing, rather than when you might just be “looking in to it”. If you don’t think you’re quite ready but would like a rough idea, take a look at our calculators.  They’ll help give you an idea of what you could borrow and how much you can afford to repay. Also, don’t apply too early.  Generally, most lender preapprovals expire within 60-90 days (depending on who they are).  You can reapply but, why do that if you don’t have to?

The process then involves your lender assessing your finances, income vs expenses and they’ll be very thorough.  You’ll need to provide a multitude of information and documents including but not limited to:-

  • How much you earn (income, salary)
  • How much you spend (groceries, rent, entertainment)
  • How much you owe (loans, credit cards)
  • How much you own (cars, shares)

At this stage, the lender will also do a credit check to get a clear picture of your past financial habits, credit accounts and repayment behaviour.  Sounds tedious, right?  It is but, First Choice Home Loans Qld aren’t here for just formal loan applications, we’re here to help secure the finance before you find that house. We know what the lenders want, so let us do the hard yards and liaise with the lender on your behalf.

Once approved, the lender will issue your approval in writing, most likely with certain caveats and may include a clause “subject to a satisfactory valuation”.  These conditions will be assessed once you apply for final approval.  Until then, house hunt to your hearts’ desire!  You know your borrowing power; you’re a force to be reckoned with!  Look out vendors, serious buyer coming through.

People, people, people, we know this is very exciting and we’re super thrilled that you’re thinking about buying your first home but, please remember… a preapproval means you’re more likely to have a loan approved, it is NOT an iron-clad guarantee.  We don’t mean to dampen your spirits but, if something serious changes in the time between your preapproval and your final loan application, from either you or your lender, it may affect what you can ultimately borrow. Changes such as:-

  • your financial position
  • market conditions
  • government regulations
  • the terms of your employment
  • you spent the deposit (don’t laugh, it happens!)
  • the lender found out about a debt that you didn’t disclose earlier
  • interest rates

A crucial one is a negative valuation of the property and we don’t mean it’s not pretty.  Remember that caveat we mentioned above, “subject to a satisfactory valuation”?  Well, it turns out that some lenders find certain types of properties unacceptable so we suggest checking with your lender before you start dreaming of living on a self-sustaining space station only to find out your lender won’t back you.  Or, maybe you got carried away at auction and paid millions for the ultimate mobile home with an above ground pool and a fixed guest wing and for some reason the bank just isn’t convinced it’s worth that much!  These changes don’t mean your application will be rejected but, expect some push back from them and a lot of justifying from you.

So, ready to get started on your preapproval or have more questions? The first step is an easy one.  Call Gail and her team of home loan specialists at First Choice Home Loans Qld and set up an appointment either in person, over the phone, via video chat or we can even come to you.

Next installment coming soon: Part 4 – House Hunting Checklist