Should I get a pre-approval?
Firstly, what is a pre approval? I think a better term would be a conditional pre-approval. A conditional pre-approval is an indication from a lender that you’re eligible to apply for a home loan up to a certain limit. You’re under no obligation to take the loan, and the lender has no obligation to lend you that amount.
That’s the important bit, the lender is under no obligation to loan you that amount.
When it comes time to actually purchase the property the lender may not want to lend on the property you have decided to purchase. They may send it to the mortgage insurer who has different criteria and rejects the loan, or the bank may simply change policies.
Another drawback is a pre-approval may put an enquiry on your credit file. Too many credit enquiries will reduce your credit score and mean that you can’t get a loan. We once had a client whose previous lender had, as a part of their pre-approval process, put a credit enquiry on their credit file. When they later went to submit the loan, the bank mistakenly ran another credit enquiry. This reduced the credit score below the bank’s threshold. Even after getting the bank to admit they made an error in running the credit enquiry again and thereby reducing the client’s credit score, they still rejected the loan!
To avoid situations like this, typically, our broker will run an assessment to get a conservative indication of a client’s borrowing capacity. This gives us the benefit of knowing what we can borrow without locking us in to a lender or compromising our client’s credit file.
We then source our client a house and land package in their desired area ensuring that all contracts are completed Subject to Finance.
The Subject to Finance condition on the contract means we are saying to the developer that we would like to buy the block of land however, we need to get a loan to purchase it. We are happy to pay an initial or holding deposit to the developer to let them know we are serious however, in the event we are unable to obtain finance for any reason, we can exit the contract without penalty and will have the deposit refunded to us.
This protects us whilst letting us simultaneously have the 3 elements a bank needs for us to get an unconditional formal approval.
Unconditional formal approvals are the aim of the game.
Should you get a pre-approval? You can but it’s probably not worth it.
Click here to book a call to get started on your home ownership with a low deposit.
