What is a preapproval?
A pre-approval is an approval of your home loan with conditions attached to it based on your proposed purchase price, loan amount required and any conditions such as closing or reducing credit card limits.
The bank will approve your preapproval loan application based on your current financial situation to confirm your borrowing capacity. This gives you the confidence of knowing what your maximum purchase price should be.
However, it’s important to note that this is only based on a particular scenario so if there are any changes such as purchasing at a higher price, your preapproval can be updated to reflect the scenario you want.
Having a preapproval can ensure you can obtain your unconditional approval much sooner during your cooling off period of 5 to 10 business days.
Preapproval vs. Unconditional approval
A preapproval is not to be confused with an unconditional approval or sometimes known as a formal approval. When your loan is preapproved, there is no obligation from the bank to provide you with an unconditional approval, especially if there are changes to your circumstances such as a change of employment or reduction in come etc.
Valuations and preapproval
The main condition related to a preapproval is the valuation of the purchase property. In order to receive your unconditional approval, the bank will need to value the property you are purchasing.
If the valuation is lower than your purchase price, your loan amount may need to be reduced or it may cause you to have to pay Lender’s Mortgage Insurance (LMI).
The banks also have a list of properties they deem unacceptable to them which may affect your
unconditional loan approval. Such examples include but not limited to: blacklisted postcodes, smaller than usual living spaces such as less than 40m2, service apartments, studios etc.
Changes in your financial situation
After you receive your preapproval, it’s very important to advise your mortgage broker if there are any changes to your financial situation. Changes in things like employment, income, taking out new loans can significantly affect your preapproval so make sure you discuss this with your mortgage broker upfront to avoid being caught out by any unfortunate surprises.
Changes in bank’s approval policy
Banks from time to time may also change their policies. Such examples include changes to their postcode restrictions, acceptable properties, treatment of different types of variable incomes (overtime, allowances, bonuses, etc). Most banks will honour the policy your loan is preapproved under during the 90 days that your preapproval is valid, however, if this expires, your loan will be assessed under their new policy, which may affect how much you can borrow.
How long does my preapproval last?
Preapprovals are usually valid for 90 to 180 days depending on the bank you have applied with.
To renew your preapproval before expiry, you will usually need to provide updated documents as evidence that your financial situation has not changed from the time you received your original preapproval.
Do I have to eventually take out my loan from the same bank I’m preapproved with? There’s no obligation to continue with your preapproval once you have found your purchase property.
This may be due to better offers and promotions available at the time you have purchased and you wish to take advantage of those offers.
As mortgage brokers, we will always review your available options at the time of your purchase. This ensures that the loan you eventually settle with is competitive and meets all your needs.
For some customers, it can take up to 6 to 12 months to find the right property. So the bank you were originally preapproved with might have changed their interest rates, offers or policies so we want to make sure you’re getting the most suitable option at the time.
When do I have to close my credit cards or pay off my HECS?
If your preapproval comes with conditions such as closing or reducing the limit of a credit card or needing to pay off your HECS debt or other loans such as a car loan or personal loan, you
don’t need to do that immediately.
As your mortgage broker, we will advise you whether you will need to satisfy these conditions because you might purchase a property below your maximum budget or have more savings as a deposit therefore needing a lower loan amount compared to the original preapproval.
If you do need to satisfy these conditions of your approval, you can do so after you have purchased the property and we have updated all your numbers based on your latest information. We’ll then advise which conditions you’ll need to satisfy.
What is the difference between a fully assessed preapproval and a system assessed
Not all banks assess preapprovals in the same way. It’s important to understand the difference between a fully assessed preapproval compared to a system approved preapproval.
A fully assessed preapproval means that the bank has allocated a loan assessor to manually review all the documents that support your loan application and checking to ensure that they meet the bank’s requirements. If there are any issues or discrepancies, the loan assessor will contact your mortgage broker for clarification, which in turn may require your mortgage broker to contact you to clarify certain issues.
Not all banks will conduct a full assessment of preapproval applications because they do not want to spend their resources on it as they know that the preapproval may not eventuate to an actual home loan with them. Therefore, they will use their automatic system to assess a preapproval.
A system assessed preapproval does not include a loan assessor reviewing your payslips, your repayment history on existing loans, analysis of your living expenses etc. It will be assessed based on the information your mortgage broker enters into the application and a credit check is done on your credit file.
A system assessed preapproval is sufficient if your financial situation is relatively straight forward and you are a low risk applicant to the bank. This usually means you are borrowing 80% of the property value and you have a large deposit or your income situation does not include any unusual or variable forms of income such as overtime, allowances, commissions or bonuses.
If your mortgage broker deems your application to be complex or that it’s high risk or that it requires an exception to the bank’s usual lending criteria, they should be recommending you apply for preapproval with a bank that will fully assess your application instead of one who relies on a system assessment.