All you need to know about loan pre-approvals
How COVID-19 is affecting the property rental market
Rental markets in Australia have taken a beating from COVID-19, with rents and yields falling in inner city areas.
What is a loan pre-approval?
A loan pre-approval is an estimation of your borrowing capacity based on your current financial position. Loan pre-approvals can provide an idea of how much you can borrow based on your income, spending, assets and liabilities. A pre-approval can be used for different types of loans, such as home loans, car loans and personal loans (including education and equipment loans). After the pre-approval assessment, the lender determines the possible loan amount as per your application.
Loan pre-approval is similar to pre-qualification for your loan, and are usually valid for three to six months, depending on the lender. You can either apply to be pre-approved for a loan, or you may receive an unsolicited offer from a bank or lender.
Should you apply for a loan pre-approval?
Thinking of buying a property but aren’t sure if your home loan will be approved? You can apply for a loan pre-approval to find out how much can be borrowed from the lender.
A loan pre-approval means you have been approved by a particular lender for a specific type of loan up to a specific amount, and can secure your finances before finalising an upcoming property purchase.
Why loan pre-approvals?
- Loan pre-approval gives you an idea of your buying limit and makes you eligible to receive financing.
- Pre-approvals can expedite the application process once you apply for the loan.
- They can also provide you with assurance and confidence before making the final purchase.
- A loan pre-approval shows your seriousness about making a purchase, which makes negotiations with vendors and real estate agents easier. Most real estate agents prefer going forward with a buyer who already has a pre-approval.
Armed with a loan pre-approval, you’re more likely to safely move forward with the loan application process for your purchase, knowing you will likely be granted a loan to cover the cost.
The pre-approval process varies depending on the lender. Some pre-approvals are handled by completing a two-minute online application, while other pre-approvals may involve more tedious tasks, such as filling out a detailed form, submitting physical copies of relevant documents and background checks.
The typical pre-approval process follows these steps:
- Get a loan application, complete it and provide the lender with the relevant documents, including identification, proof of income, savings and current debts (if any). This will help them assess your financial situation.
- Your loan application package will be reviewed by the lender.
- The lender will quote the amount they are ready to lend along with the applicable interest rate based on loan type, providing you a pre-approval.
It is important to note that some online pre-approvals don’t involve a complete credit assessment, meaning the process can be completed faster. However, these may not be as reliable as completing a pre-approval with a longer credit assessment process.
Types of loan pre-approvals
- Conditional pre-approval: This is the highest possible level of trusted pre-approvals. When assessing pre-approvals, your application is carefully examined by an authorised person. A conditional pre-approval is valued more than a basic pre-approval, however a conditional pre-approval usually takes 10 to 20 days, with a lot of advanced processing. In addition, the closing of these loans usually takes less time when compared to standard pre-approvals.
- Bad credit pre-approval: These pre-approvals are for people with credit issues or low credit scores. Many lenders do not approve loans for people with low credit scores and income, recent bankruptcy or defaults. Sometimes, individuals with bad credit also receive unsolicited pre-approvals from lenders. It is important to do your research so you can be confident in these pre-approvals, as the terms and loan amounts vary depending on the borrower’s circumstances.
- Self-sought/on-the-spot pre-approval: These are instant pre-approvals, mainly used for personal loans such as car loans to check how much you’ll need to borrow without even submitting a formal application. These are more like on-the-spot approvals to work out the loan amount to be paid before making a purchase.
Benefits of loan pre-approvals
- You can get pre-approvals for free.
- You become more aware of your maximum purchase price.
- Your financial situation gets assessed.
- You know if your spending capacity meets the lender’s lending criteria.
- You can make a purchasing decision and buy more confidently.
Key points about loan pre-approvals
- Loan pre-approvals are purely an indication of your eligibility to receive a full-fledged loan once they’re finalised and processed.
- A pre-approval neither makes a lender obliged to grant you loan nor provides any rights to the borrower to claim it.
- A pre-approval doesn’t guarantee that the bank will accept your property as loan security. That will be decided when your loan application is being processed.
- Every pre-approval will have different validity, which needs to be checked before moving forward with the loan application process.
- The lender might have certain terms and conditions which need to be met to get pre-approval.
Common reasons for loans not being approved
A loan pre-approval does not always guarantee that your loan will be approved. Here are some of the reasons the lender might reject your loan:
- Changes in personal finances: A drastic change to your personal finances may lead to a decline of the loan offer. For example, if you switch from a full-time to a part-time job, or take out other loans or credit, your finances will be affected, which may lead to a reassessment of your loan application. If your situation doesn’t meet the lender’s lending policy, your loan application can get rejected.
- Revised market rates: A significant change in market interest rates since your loan’s pre-approval means your lender may need to re-evaluate your financial situation, which could lead to your loan application being declined even after pre-approval.
- Modification in lender’s policy: If there have been changes in your lender’s policy since you achieved the pre-approval, your loan application may be assessed again to check if it meets the latest lending policies.
- Decline from LMI providers: If your loan amount is for more than 80 per cent of the original purchase value, lenders need additional approvals from lender’s mortgage insurance (LMI) providers when processing your loan application. These LMI providers might have different guidelines compared to banks or lenders. So your loan application initially approved by banks might get rejected by these LMI providers. You can pre-calculate your loan amount using LMI calculators to avoid these situations.