Navigating Pre-Approval in the Home Buying Process
So you’d like to buy a property? One of the first and most important steps you should take is to get pre-approved for a home loan. You’re probably asking, what exactly is a pre-approval, and why do I need it? Let’s break it down.
What Is Pre-Approval?
Pre-approval, also known as conditional approval or approval in principle, or AIP (because we need at least 4 names for the same thing right?!), is when a lender gives you some commitment that they’re willing to lend you the money you want to borrow. It’s an approval, but with conditions. Usually the conditions are things like – satisfactory valuation on the new property, LVR to remain at/under what was applied for, rental yield to be at/under what was applied for, things like that.
This means that as long as you apply for a Pre Approval with the “worst case” figures (purchase price, LVR, rental yield), then you’ll be as approved as you can be, prior to having found the property.
The process involves submitting a loan application to the bank with financial information such as your income, expenses, existing debts etc. The lender will then assess whether you’re eligible for the loan you’re applying for. A Pre-Approval typically lasts for 3 months, depending on the lender. If your pre approval expires, as long as nothing has changed with your circumstances, then usually it’s pretty easy to extend it for another 3 months.
Why Do You Need Pre-Approval?
- Know Your Budget
A pre-approval gives you a clear budget for your property hunt. No more guessing games – you’ll know exactly how much you can borrow and what price range you’re playing in. - Confidence When Making Offers
A pre-approval shows agents and sellers you mean business and can move fast. It gives you serious negotiating power because they know you’re not just browsing. Sellers love pre-approved buyers – it means less risk of the deal falling over.
Side note – remember, often sellers have a timeline that they’re working toward. They may need to sell in a certain amount of time, in order to secure the property that they’re locked into buying. If a buyers finance falls through, this can lead to huge delays, which in turn may mean the seller has penalties to pay on the property they’re purchasing. - Avoid Disappointment
Imagine finding your dream home, only to realise later you can’t get the loan. Ouch! Not just for you, but as I said above, for the seller. No one wants this pain! A pre-approval helps dodge that bullet by showing you what’s actually in your budget before you start searching. It saves time and energy (for everyone involved) by keeping you focused on homes you can afford. - Streamline the Process
When you have a pre-approval, you’re already one step ahead. When you find the right property, getting Formal approval (the big approval!) is faster and smoother since the lender has already checked out most of your financials. This means you’re able to meet your finance deadline far easier. A lot less stress all ‘round! - **Auction purchases are unconditional**
Last, but certainly not least, I strongly recommend getting a pre-approval prior to bidding at Auction. Why? Auction purchases are unconditional. That means that when the hammer falls, if you’re the highest bidder, you must settle on it.
If you buy a property at auction, and for whatever reason can’t get the finance to settle, you’ll be out of pocket 10% (of the purchase price) plus any other costs to the seller. That could equate to hundreds of thousands of dollars.
There’s always a risk when buying at auction because there’s no way to get Unconditionally Approved prior. However, by having a pre-approval in place before you bid, will mean you’re as approved as you can be, which will significantly minimise your risk.
How Do You Get Pre-Approval?
The pre-approval process means submitting a loan application to the lender, supplying all of your information, such as;
- Proof of income (payslips, Income Tax Statements (PAYG summaries) or tax returns if you’re self-employed)
- Details of your assets and debts
- 6 months bank statements for every account you own (savings, salary account, credit cards etc)
- 100 points of ID
Once these have been submitted, the lender will review everything and let you know if you qualify for pre-approval. Just remember, pre-approval isn’t set in stone—you’ll still need to tick a few more boxes to get Formal approval (the big one!).
If you’re ready to take the next step in your property search, hit us up for a no obligation friendly chat about how best to get that bad boy secured! Make an appointment today or give us a call on 02 6188 4555. Let’s get this show on the road 
!
