Are pre-approvals worth it?
Whether you're a first home buyer, upgrader or investor, you would have probably herd of a pre-approval. To put it simply, a pre-approval is a conditional approval from a lender, with the only conditions being:
- Finding a suitable property
- Conducting a valuation on the property
Although these are usually the only conditions, the lender can still ask for more if they see fit.
A pre-approval will usually last 3 months without having to provide any further financial documents. Some lenders offer a 6 month pre-approval as long as you can provide new evidence of income after the 3 month period.
A private treaty is when the property you wish to buy is on the market, you present an offer to the real estate agent & the agent presents the offer to the vendors, which they can decline or accept.
This method of purchasing is safe from the buyers position because you can easily add subject to finance &/or pest & building inspection if need be. This simply means that if you can't get finance for whatever reason, you can break the contract.
Although you can put conditions on this type of contract, it is still beneficial to have a pre-approval in place. Having a pre-approval in place is peace of mind for you, the real estate agent your buying through & also the vendor. Not only that, if you or the vendor want or need a quick settlement, being pre-approved means that the lender will not have to assess your application which in turn cuts down time.
Buying at auction can be a daunting task, there is a lot to it & there are things that you should know before attending an auction.
One of those things that you have to be aware of is that there is no finance clause if you purchase at auction. This means that if you cannot get finance, you are still legally obliged to purchase the property. Not only is there no finance clause, but you are required to pay a non-refundable 10% deposit as soon as you buy the property, meaning that there is a risk of loosing a lot of money if you cannot get finance.
Although you can't have a finance clause if you are buying at auction, what you can do is have a pre-approval in place. Having a pre-approval is the best thing you can do to reduce your risk when buying at auction. As long as you’re not spending more than what you are pre-approved for, there shouldn't be any issues getting the home loan.
Different types of pre-approvals
With all the different lenders out there, there's no shock when I say that they all offer a different pre-approval. Some lenders will pre-approve you based off what you tell them (eg. how much you earn & how much deposit you have) & some will order credit checks & want to see every piece of documentation that you have.
If you receive a pre-approval without providing any financial evidence (pay slips, bank statements, etc.) you should be very careful. Having a properly assessed pre-approval is much more reliable as they check your application in detail & do all the necessary checks before providing the pre-approval.
One easy way to tell if you have an assessed pre-approval is to ask yourself if you submitted your pay slips & other financial documents to the lender or broker. If you did & it took a few days for the pre-approval to come through, chances are that you have a full assessed pre-approval, which is the only pre-approval worth anything in my opinion.
To sum everything up, no matter what method you use to buy your property, it is ALWAYS a good idea to have a fully assessed pre-approval in place BEFORE you start looking for a house. Not only is it peace of mind but can also save you time when push comes to shove. A pre-approval is usually free with no downside that I can think of, if you are in the market for a new home make every bodies lives easier by having a pre-approval in place with the lender of your choice.