Things tend to move quickly once you have found your dream home. When applying for a mortgage, it is crucial to realise that the lender generally finances 80% of the house value, as well as several other aspects such as equity, income, and so on. In this instance, lenders play a critical role in getting your ideal property, particularly when our budgets are limited.
Before we get into the benefits of pre-approved loans over traditional loans, it is important to understand what a pre-approved loan is and how the process works.
What is a pre-approved home loan?
A pre-approved home loan, as the name suggests, is a loan that is granted before the property transaction is completed. This is the same process as applying for a conventional loan, but the difference is that you do not need to supply any property-related papers.
Lenders require a few necessary documents for validation, such as an income tax return, driver’s licence, proof of address, bank account statements, and proof of income such as payslips, etc. This approach also includes a processing fee, which is adjusted when the loan is disbursed.
Lenders will also request your credit score to determine your creditworthiness. If the applicant already has a loan, the previous loan amount will be deducted from the approval limit. It gives you conditional permission for a mortgage or an investment loan. It normally lasts for a set period of time – usually three to six months, but this can be extended with a review and request – and acts as a guideline for how much you can afford to spend.
Moreover, once the validation procedure has been completed, the lender will issue the applicant a letter of pre-approval for a home loan. This pre-approved home loan provides a set time frame for the borrower to finalize the property purchase. If the applicant does not get a property within the given time frame, they must reapply for the pre-approved loan because the processing fee is not reimbursed or altered later in the loan application.
Now that you understand the basics of a pre-approved loan and the process, let us look at its benefits.
Benefits of having a pre-approved home loan
Final loan disbursal becomes fast and easy– With the majority of loan verification done early on, the loan disbursement process becomes relatively fast and simple. The only documents awaiting validation are the property documents. The sanctioned loan amount is disbursed as soon as the documents are confirmed. This also benefits buyers when the property has a shorter transaction window and a term for the process.
House hunt becomes easy and more focused– Real estate holds a variety of various houses, such as apartments, units, and independent houses, among others. If the applicant already has a budget in mind, the search for a home becomes much easier. Loan pre-approval tells you how much you can afford, allowing you to shop for properties that are within your price range rather than wasting time looking at properties that are out of your price range. For example, a person with a pre-approved loan of $800,000 will hunt for a home in the $800,000 to $900,000 price range. There is no worse feeling than being unable to close on the home you want to buy. The borrower is in a better position to hunt for a suitable house with a pre-approved loan as being aware of the budget.
Negotiation process becomes easy– There is a better chance for you to bargain with builders or sellers once you have a pre-approved loan, and they will take you seriously in comparison to any other prospective buyer as they have proof that you are 100% invested in purchasing. Estate agents can see that you are a serious buyer who is ready to act swiftly if your loan is pre-approved. This provides you with more bargaining power when negotiating prices with sellers. This is because the bank is confident in your finances and ability to repay, and they are more likely to convert into genuine purchasers rather than broad inquiries. With pre-approved loans, along with the low-interest rates, you can also choose the loan’s repayment term, which allows for more affordable installments.
Finances are more planned– pre-approved loans enable a person to understand his or her financial situation and value. Furthermore, this allows a person to manage their savings and make a down payment effectively. With a loan pre-approval in hand, you are less likely to make an offer or pay a deposit on a home only to discover that you are unable to acquire financing to finalise the acquisition.
Bid with confidence at auctions- Pre-approval is necessary if you are purchasing a property at auction. It shows that the highest bidder is committed to the purchase when the hammer falls at auction – there is no cooling-off period. With loan pre-approval in place, you can confidently bid up to your approved loan amount.
To sum up, getting pre-approval for a home loan does not necessarily ensure that your loan will be accepted. Property and related paperwork, as well as the bank’s due diligence criteria, play an important role. Furthermore, the loan application must be submitted within the sanction period. Aside from these considerations, a pre-approved loan always provides an advantage that normal loans do not.
If you are ready to take on the journey of homeownership, reach to our expert mortgage broker and we will provide you access to a wide choice of lenders, including many major banks.
We understand these lenders’ loan pre-approval standards, making it faster and easier for you to apply for pre-approval. And, once you have discovered your dream home, we can speed up your official loan application by preparing the paperwork, filing the application, and following up on your behalf.