The Loan Pre-Approval Process

The majority of lenders offer the pre-approval service for free. If a lender intends to charge you to pre-approve your loan, you should go to another lender. The great advantage of pre-approval is that it lets you know how much you can borrow. This lets you focus on buying what you can afford, or saving more to get the type of home you want.

Pre-approval also assists lenders and mortgage brokers as they will not have to tell the borrower that they cannot get the loan they seek when they find the property they want to buy. This can cause great disappointment and anger and it is not something that lenders and brokers relish.

To apply for a pre-approval, you need to submit all the information and documentation that you would when applying for a normal loan, except you will not need to supply a copy of the purchase contract, as you have not signed one yet.

There are various conditions for pre-approval, such as a valuation of the property or proof of your income. Lenders usually require valuation when the loan exceeds 80% of the purchase price. They will normally pass on the cost of the valuation to you by including it in the establishment fees associated with the set-up of the loan. The cost of valuations varies widely between lenders, so you should shop around for a lender with a good valuation fee. Mortgage brokers can assist you in finding the right lender. You may be required to pay the fees upfront.

When deciding on the pre-approval amount, the lender will only lend on the purchase price or the valuation amount – whichever is the lesser.

If you are successful in obtaining pre-approval you must ensure that you obtain written confirmation from the lender. Tell the lender that you want this.

If you are considering purchasing a property at auction, your pre-approval must be unconditional, as all auction purchases are unconditional. An unconditional purchase contract means that you have purchased the property and you have no option but to ensure that the purchase proceeds to settlement. There is no cooling-off period. You have purchased the property and cannot back out. If you fail to settle you can be sued by the seller.

The usual type of contract is known as a conditional contract. This means that, subject to the seller’s approval, you could include extra conditions that will need to be met in the contract. The conditional contract gives the purchaser the maximum amount of protection in relation to buying a new home.

The usual inclusions in the conditional contract are:

• Subject to finance.
• Subject to a building inspection.
  
• Subject to the sale of another property.
  

• Loan pre-approval is written confirmation by a lender that it is prepared to lend your money.
• You must provide all documentation you would supply for a standard loan application, except you do not have to supply a copy of the purchase contract.
• A valuation of the property is usually required if you wish to borrow more than 80% of the purchase price.
• The contract can unconditional (for auctions) or conditional (ordinary sales).
• Make sure you get the pre-approval in writing.

Article correct at its author date: Jan 2007. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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