Let’s talk pre-approvals. What is a pre-approval? Why should you get one? What are the two different types of pre-approvals?
Firstly, pre-approvals can be called different things, (depending on the lender) such as indicative approval, conditional approval or approval in principle. They all pretty much mean the same thing, you are not yet guaranteed finance as there are still ‘conditions’ that need to be met, before receiving formal approval and being assured finance from the lender.
Going to a bank’s online calculator and typing in your details, DOES NOT count as a pre-approval! This actually has no standing with the lender.
Two types of pre-approval
1. Fully Assessed – this is where your application is sent to the lender’s credit team to be assessed. This is a more comprehensive pre-approval, may take several days to complete and therefore can provide more confidence that the lender is satisfied with your application. This type of pre-approval is generally subject to the property you are looking to purchase being acceptable, and perhaps other small conditions that the lender may require you to meet.
2. Auto Approval – this is a computer-generated pre-approval, based upon information submitted. The computer system decides whether information submitted meets their guidelines, however does not verify this information via the usual documentation process. This means that this type of approval IS NOT assessed by a credit assessor for the lender and therefore is much less reliable than a fully assessed pre-approval. Basically, an auto-approved pre-approval has very little value and doesn’t offer the client a great deal of security. In short, it’s not worth the paper it’s written on (or screen it’s displayed on!)
Why are we telling you this? Because it’s our job as brokers, to know which lenders are issuing auto approvals and which lenders are conducting a full assessment prior to issuing a pre-approval.
Pros of a Pre-approval
Generally, we would advise clients to get a pre-approval, prior to beginning their search to buy a new property. We would submit a pre-approval to a lender for the maximum amount the client is comfortable spending on their new purchase (providing this amount meets the lender’s servicing requirements). Once pre-approval has been granted, you would have a better idea of your borrowing capacity and have more confidence looking at property and submitting an offer to a real estate agent.
Cons of pre-approvals
Whilst it’s great to have a pre-approval, know that each time you get a fully assessed pre-approval, a credit check may be conducted which could affect your credit score. Also, you need to be aware that pre-approvals expire, depending on the lender, they are generally valid for 90 days, sometimes 6 months. If there are any changes to your circumstances in this time, your pre-approval will also need to be re-assessed. A pre-approval will often be conditional upon the purchase of a property. It is important to note that if the lender deems the property you are purchasing, as unsuitable, your loan may not be formally approved.