Whether buying your first home, upgrading or investing – it is important to ensure you have a pre-approval in place – but why? And how strong is a pre-approval?
Firstly, you need to know what you are capable of borrowing. There is nothing worse than investing the time to find your dream home and making an offer, only to find out your unable to get the loan.
You’d be surprised at how many home buyers will jump online and use one of the thousands of DIY online borrowing capacity calculators. These calculators are nothing more than a general guide and are highly inaccurate – they do not take in to account personal circumstances, make allowances for lender policy and are open to interpretation.
Real estate agents and sellers love certainty. Many sellers are motivated to sell and often have reasons unknown to you to get a quick sale. It could be a relationship separation, or the seller could be relying on their current home to be sold by a set date in order to meet the conditions on the new home they are buying. Put yourself in the seller’s position and consider which of the following offers you would accept if you were in a hurry;
Offer 1: $500,000, borrowing 95% with no pre-approval
Offer 2: $495,000, borrowing 70% with a broker verified pre-approval with the only condition being subject to the client locating a suitable property
Offer 3: $498,000, borrowing 95% with a lender direct pre-approval that states – subject to income verification, employment verification, evidence of genuine savings, and a large list of other conditions
Pre-approvals strengthen your offer, encourage the selling agent and the client to take you more seriously and can help fight of multiple offers, take price away from the equation a focus on a solid offer.
Bank Vs Broker verified pre-approvals – what is the difference?
Banks receive hundreds of pre-approval requests every week, most of them never proceed or are just shopping around for the cheapest interest rate – so you can understand why banks may take a short cut and avoid providing a fully verified pre-approval up front.
When approaching a bank, most of the time you will speak with the branch staff or their mortgage lending officer. Generally they will take your information verbally, enter it into their system and from there the system will assess your eligibility and provide you with a pre-approval letter – These generally have a list of conditions, including everything from verifying your income, verifying your deposit and verifying all the information you have supplied verbally.
In many cases your application won’t be viewed by a credit assessment officer until you locate your property and apply for formal finance approval. At this point the only person that has really considered your application is either the person at the counter – or their auto assessment system, and not the lenders credit assessment officer.
If your circumstances are straight forward with no room for interpretation, then this option can still be effective. However, one of the biggest risks with this model is in your interpretation of your circumstances vs the lenders credit assessor’s interpretation.
For example, you’re working in the mines earning $100,000 per year, and so this is what you advise the bank. The loan is then pre-approved and you find your dream home. The loan is now sent off to the lenders credit assessor to make their final decision. The credit assessor will review your income documents and will break it down into categories including base wage, allowances, overtime, deductions and more. In this instance the banks policy is to accept 50% of overtime and allowances – suddenly that $100,000 per year income is reduced to $60,000 a year in line with the banks current income policy.
You’re now at the crucial moment when you need to have finance in order to meet your contract of sale conditions, and the bank is now advising you that you are not eligible. Often the information you are given when the lender issues a decline letter is not specific and vague at best. Many home buyers will just throw in the towel at this point and give up, believing they will never get their home.
How is a broker’s pre-approval any different to a bank?
An experienced broker will know the lenders policy they are recommending, in some cases better than the lenders credit assessment officer – I’ve had a number of cases where a loan has been declined by a lender because the assessor was new and did not understand their lending policy – by educating the assessor and getting my contacts within the bank involved, I’ve been successful in turning a decline in to an approval!
When a broker makes a verified recommendation, this means they have reviewed your documentation and assessed it in line with the lenders current policy and they believe you to meet their policy, and in most cases the channels that a broker goes through to obtain your pre-approval requires the lenders credit assessor to review the documents that have been provided to ensure they agree with the brokers recommendation.
Things don’t always go as planned!
Although our success rate is generally very high – things don’t always go as planned, so it’s great to have a qualified mortgage broker in your corner, batting to get your home loan approved!
It’s worth remembering that a mortgage broker only gets paid if your home loan is approved and settles. A mortgage broker generally focuses on finding a way to make each and every application successful – bank staff certainly does a great job at general banking – but they are not specialists and more often than not, paid an annual salary. Their focus is on getting the numbers in the door – so, who do you think is going to fight harder to get your home loan approved?
If for some reason you’re still unsuccessful, the broker already has all the information they need to recommend a new lender and make the application happen fast. When you’re at the end of your finance due time frame, you don’t have the time to go from lender to lender trying to find a competitive option that will be approved quickly or approval at all. Choosing the right lender that can approve your application fast could be the difference between you meeting the finance cut-off and the seller re-listing the property.
There is a reason why Mortgage Brokers now account for over 50% of the lending market – speak with your mortgage broker and let them guide you and obtain your pre-approval. Let your mortgage broker take on the banks and save you the hassle of doing it all yourself!
Regards, Daniel Reid – Director, Emanate Finance