Note: This post has been completely rewritten as of the 11th of August 2021.
The best place to start your property purchase is a loan pre-approval. That’s because, amongst other things, a pre-approval will give you a fair estimate of how much you might be able to borrow for a property purchase. Having a ballpark figure in mind makes it possible to narrow down your choices and find a house that’s within your budget to avoid any disappointment at a later stage.
Most pre-approvals come with a rate-lock for 90 days, which means you get your home loan at the same rate if you finalise a property within the stipulated period, even if the rates go up. Of course, you get to choose a lower rate if the interest rates happen to go down. However, the important thing to remember is that a pre-approval is just a preliminary step in the mortgage application process. It only means your application is more or less aligned to the lender’s borrowing criteria. It’s not a guarantee that your mortgage will be finalised. Yet, it’s also true that a lender will usually assess your personal information, like your income and expenses, before granting you a mortgage pre-approval, which might increase your chances of final approval unless your financial situation or circumstances change.
If you’re wondering whether it’s mandatory to get pre-approved for a home loan, the answer is ‘No’. But most experts agree that a home loan pre-approval is good to have. For instance, you might like a property, but when you apply for a mortgage, you find out you qualify for a lower amount. If you’re pre-approved for a mortgage, you’re likely to search for properties within that range and avoid such a situation. Buyers at auctions also tend to feel more confident when pre-approved for a mortgage because they know their home loan is likely to go through.
How Long Does It Take To Get Pre-Approved?
Many lenders offer an instant online pre-approval which might be a good place to start if you’re only looking for an estimate regarding how much you could borrow. But keep in mind that system-generated pre-approvals are conditional on the information you provide. The lender doesn’t carry out a credit check in most cases. Thus, things could change significantly when a full assessment is carried out at the time of final approval.
You can also apply for a regular pre-approval that includes a credit check and document review. While this could take a few days to come through, getting pre-approved after a full assessment can make things simpler down the line for you. As the lender has already assessed your credit, things could move faster when you apply for a final approval. You’ll only need a property valuation and confirm that your financial situation hasn’t changed for the worse after you were pre-approved for the mortgage. However, there are certain situations in which your mortgage application might be declined despite a pre-approval.
Read on to find out what you must avoid between pre-approval and approval to increase your chances of getting a home loan:
- Job change – As Anna and Blake decided to buy a home, Anna also decided to switch careers from a full-time architect to a freelancer. However, their mortgage broker advised them against the move, as the couple had already taken pre-approval for their home loan.
Job security is an important aspect that convinces a mortgage provider to lend to you. A change in employment, especially after pre-approval, can seriously impede your mortgage approval. It is best to wait until your loan is finalised. However, if the change is inevitable, be forthcoming about it so that the lender is apprised of the situation. Often, if you’re simply moving from one employer to another in the same field, and your salary isn’t getting affected for worse, lenders will be willing to advance a home loan to you.
- Incurring additional debt – Most borrowers do not understand the concept of credit score and are surprised when their mortgage is declined, especially because they had been doing everything right. Or is it?
It’s not uncommon for homebuyers to take a car loan after pre-approval or rush to sales to load up on furniture and accessories for their new home, piling a considerable amount of debt on their credit cards. What seems like an innocent shopping spree is often perceived as a red flag by lenders. Any additional debt will alter your debt-to-income ratio. A high DTI makes it easier for lenders to decline your mortgage application.
- Not paying your phone bill on time – Yes, not paying your telephone bill, or any other utility bill, on time, and missed credit card payments can derail your mortgage application by lowering your credit score.
Mortgage providers have strict criteria for lending, and if your credit score falls below a certain number, your mortgage may be declined when the lender scrutinises your credit report closer to the settlement date. Be careful and read this article for tips to maintain a high credit score.
- Change in financial circumstances – Any change in your financial circumstances during the pre-approval period will affect your mortgage approval. Thus, it’s important to maintain both your income and expenditure during the period. True, some circumstances might be outside your control, such as emergency expenses for an illness or a job loss. But you must control what you can by avoiding any large purchases, not incurring any new debts or receiving any large payments in your account without proper documentation.
It also helps to have sufficient savings in your account accumulated over several months. Additionally, remember to keep some funds aside (up to 5% of the total purchase price) to take care of accessory costs such as stamp duty (calculate using our Stamp Duty Calculator), conveyancing fee, loan set-up fee, etc., at closing.
- Not being honest enough – Complete disclosure of your financial condition, including your income, expenditure, assets, credit cards, personal debts, and even the school fees of your kids must be made while applying for a home loan. Your mortgage provider will not be pleased if they discover any new information during the pre-approval period that you had not disclosed previously, whether deliberately or not.
- Not meeting lender’s criteria – Lenders always conduct an independent property valuation before advancing a loan against it. If the property you intend to buy does not meet the lender’s criteria or is of lesser value than what you are paying for it, the lender will not approve your home loan.
- Changes in lending criteria – Another issue can arise if your mortgage provider’s lending criteria change during your pre-approval period and you no longer fit into the new standards. For example, if your bank previously pre-approved you at a credit score of 650, and later came up with a policy not to lend to buyers with a credit score of less than 700, your pre-approval will automatically be redundant if the changes are applied retrospectively.
It’s not often that buyers are declined a mortgage if they have the requisite deposit and have obtained pre-approval. Of course, if you lose your job, change your mind, or cannot finalise a property within the given timeframe, your pre-approval will no longer be valid. But in most other cases, if you follow the above-mentioned tips, you can look forward to purchasing your home soon (the shopping must wait, though!).
If your loan was declined after pre-approval, don’t rush into applying for another pre-approval from a different lender. Instead, ask the lender why your application was denied and make efforts to remedy the situation before making your next home loan application. You may also consider talking to a mortgage broker who can help you assess the situation and guide you to lenders who are more likely to approve your mortgage application.
At Hashching, we have over 600 verified brokers who could guide you to the best home loan deals for your financial situation (Ask a broker now, for free!). Our brokers will also help you prepare and lodge your application in a timely manner to secure a mortgage pre-approval. They will hold your hand throughout the process and even after the loan is disbursed by regularly checking up with you to make sure your home loan is right for you at every stage of life.