Pre-approvals – Why you should bother….
With the quieter Winter season behind us and the Spring selling season in full swing, we have seen an increase of borrowers come forward saying they have been ‘pre-approved’ by their bank only to discover they never were actually formally pre-approved for the home loan!
A Pre-approval is exactly that…pre-approval. It is not an offer of finance in any way at all.
Let’s try and explain this in simple English – using an example
Couple X are employed full time in their respective roles, he two years, she three years.
Together, they earn a very reasonable income and have both managed to save around 17% of the purchase price of the anticipated property they were thinking of buying.
They contact their bank by phone and are told that based on their annual income amounts, they could borrow ‘x’ amount and they were good to go.
So, they do.
Both get excited, go to an auction, place a few bids and buy the property, congratulations!
They contact their bank to share the great news and proceed with a formal home loan application just as they had discussed previously. As part of the application process, they provide the bank with the obligatory savings statements, pay slips, PAYG summaries etc to have the home loan application formally approved.
About a week goes by and they receive a call from the bank and are advised “Thanks for your home loan application, unfortunately it does not meet with our current qualifying criteria, we wish you all the best for your future”. What the??????
We have seen an increase in similar examples of borrowers being told they are pre-approved based on a casual conversation with a bank employee and taking that conversation as confirmation that the bank will formally approve their loan. The reality is, without verification of financial details to support the initial ‘pre-approval’ discussion, this type of pre-approval process can only be considered a guide on potential borrowing capacity and should not be taken literally or as a guarantee that the lender will approve the loan.
Going back to our example, Couple X have great jobs, but a $120k package does not mean you earn $120k! Once you take $15k out for the male’s car allowance, then a further 9.5% for the compulsory super, his income is actually $95,890 not $120,000! Similar scenario for the partner! Her $95k package equals $73k so their $215k combined income is actually about $169k – this makes a significant difference in borrowing capacity.
A true pre-approval is when your home loan application is submitted in full, with all supporting documentation and assessed by a credit assessor who then issues a Conditionally Approved letter in writing with the only condition being address of the property being purchased.
If you would like further information about getting your application pre-approved, please call me on 0438 041 111 and I will be happy to discuss.
As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take the Confusion Out of Lending’
Peter Vinci - 0438 041 111