If you are shopping for a new home, chances are that you are hunting for the perfect home loan too. But it is not necessary that you apply for a loan after you find your dream home. Rather, you have the option to arrange for a loan beforehand. This is where a loan pre-approval comes into the picture. A pre-approved loan helps you arrange for your finances in advance so that you can go forward with a stress-free search.
What exactly is a loan pre-approval?
A loan pre-approval can be seen as a preliminary approval by a lender to a prospective homebuyer, that encompasses a written assessment of the buyer’s creditworthiness for a loan. It simply means a lender’s assurance of giving you a loan once you submit a complete application. Your application remains valid for a certain time limit, usually three to six months.
The lender or the bank assesses your ability to repay a loan on the basis of your income , expenses, savings, assets, liabilities, and repayment history of existing and previous loans. The assessment also includes your readiness to repay a loan which is gauged on a number of elements such as credit score, consistency in employment history and the number of times you’ve changed your residential address. Other factors include the loan to value ratio and whether the proposed application goes along with the overall policies and parameters of the lender.
The pre-approval will be subject to valuation and is susceptible to change depending upon personal circumstances. Once you have chosen your dream home, you apply for full formal approval. It usually takes one or two days but if valuations are required, the process may take a few days. When the property is finalized, the lender will then assess the property to approve it. When the lender approves the loan, a bank valuation is done on the property and the details are verified through the assessment model.
You will be required to be prepared with a full range of loan application documents like personal identification, proof of income, proof of savings such as bank statements, and details of other debt like credit cards and personal loans. Make sure to get the pre-approval in writing and consult your mortgage broker to choose the right loan for you. Your broker will advise you at each step of the process so that you can smoothly proceed to final approval.
Why should you go for a loan pre-approval?
- You know how much you can spend
Getting a pre-approval will allow you to know your borrowing limit and you can work out a price range within which you can look for properties. It helps you immensely in budgeting and allows you to set realistic expectations. - A pre-approval can expedite the processWhen you have your loan already pre-approved, getting an unconditional approval will be faster before settlement. It is best to apply for the loan as early as possible in the buying process. You can make an offer immediately as you find your desired home.
- It gives you more bargaining powerWhen you have a pre-approved loan, you have an edge over others as you are considered a serious home buyer. With your finances arranged in advance, you are in a position to act quickly. Keeping this in mind, vendors may also want to offer you a lower price than was advertised.
- Gives you confidence at auctionsWhen you are bidding at an auction, pre-approval can help you immensely. In an auction, you do not get a lot of time to arrange for your finances as you have to make a bid on the spot. Knowing that you have your finances in order will help you bid with confidence up to your approved loan limit.
- No extra costIt does not involve additional expenses as the lender’s establishment and application fees apply only when you are formally approved for the loan.
Other things to keep in mind
Remember that the property you are buying is equally important in the final approval process. The home you choose has a significant impact on your pre-approved loan getting converted into a formally approved one. For instance, if your property’s valuation indicates that you paid much more than the property deserves, then your application might be rejected.
Changes in personal situations like a new job could also jeopardize your loan approval. External circumstances like a change in the market interest rates can mean that you will be allowed to borrow less than you originally applied for.
Over To You
Loan pre-approval is also known by a few other names such as conditional approvals and approvals in principle. They all mean the same. The important thing to remember is that you be prepared for every aspect weighing out all the risks, as there are chances that your pre-approved loan might not work out. But otherwise, it helps you to be prepared well in advance for one of the most important decisions of your life, i.e. buying your dream home.