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Why Home Loan Pre-Approval Is Important

Potential buyer

Before you start shopping for your dream home, it’s a good idea to get your finances in order. Getting a home loan pre-approval from a bank or financial institution will not only help you set your budget, but is an important step towards minimising your financial risk. 

What is a home loan pre-approval? 
When you approach a lender to request that they grant you a mortgage, they will use the information you give them to assess how much money they are willing to loan you. This essentially helps to establish the budget for how much you can really spend. 

A home loan pre-approval is a letter from your bank or financial institution saying, in principle, how much money you can borrow to buy your new home. It is not a guarantee and it is subject to change – for instance, if you lose your job between getting pre-approval and finding your dream home, then the bank may decide not to proceed with the mortgage because your financial circumstances are too risky.

Unlike a pre-qualification, a pre-approval shows that the lender has actually performed a credit check, investigated your financial situation and assessed your ability to repay the mortgage. A pre-approval is also not the same as a final approval as it can be voided at the lender’s discretion. 

Pre-approvals are often only valid for a set period of time (90 days is common) and will be subject to a valuation of the property you want to purchase and that you meet all the conditions of the mortgage as stated in the pre-approval. 

What is the difference between a home loan pre-approval and final approval?
Pre-approvals have limited life span and are not guarantees that a mortgage will be granted. They are also conditional on particular financial circumstances – both yours, the general property market’s and the specific property you want to purchase. 

Once you have pre-approval and you have chosen your dream home, your lender will have your property valued. Based on this valuation, the bank or financial institution will (hopefully) then grant you a final approval for a specific amount. This allows you to then go into the branch to sign a legally binding contract and guarantees your mortgage has been approved. 

Why is a home loan pre-approval important?
Home loan pre-approval is important because it offers peace of mind. It allows you, the vendor, the real estate agent and the bank or financial institution to know what is a realistic amount of money that you can comfortably spend on your home. It gives everyone the security that you will not be taking on too much risk and that your financial goals are achievable. 

What if I don’t get pre-approval?
Signing a contract for a sale of land without pre-approval is a risky business. For a start, you may find that real estate agents and vendors won’t take you seriously and will not enter into negotiations with you if you make offers for property without any evidence of pre-approval.

Secondly, if you actually do sign a contract without home loan pre-approval, you are still legally liable to fulfil the contract and come up with the money to close the deal at the time of settlement. If you are unable to find a bank or financial institution to agree to lend you enough money to cover the costs of your new home, you will have to default on the contract and may lose your deposit. 

Alternatively, if you shop around to multiple lenders attempting to get pre-approval and none of them agree, this is probably a strong sign that you are not in a financial position to be considering purchasing a house right now. Several failed attempts to secure pre-approval can damage your credit history and reputation should you chose to try again for a home loan in the future. 

Home loan pre-approvals may not apply to unregistered land
Money lenders cannot provide final mortgage approvals on land that is unregistered. Unregistered land is land that is not ready to build on, usually doesn’t have infrastructure and isn’t yet subdivided. This means that if you receive a home loan pre-approval and then put a deposit down on unregistered land, there is a higher risk that your bank or financial institution may not give final approval or they may only give it after significant and stressful delays. 

If you are thinking about buying a property, it is prudent to only purchase registered land as it is more likely that your lender will grant their final approval faster.