You agree to purchase a property for $2.5m, pay a $250,000 deposit – and then find you can’t get finance.
You may be surprised to know that this is not that uncommon – and it’s going to become more common both due to a cooling market and tighter lender restrictions.
The answer to avoiding all this stress and not to losing a quarter of a million dollars is pre-approval.
Pre-approval allows the lenders to fully vet an application – particularly their credit history, employment history and savings pattern. When a lender gives you a pre-approval, they say to you, ‘we will lend you up to $x, subject to finding a suitable property’. In fact, normally the only outstanding thing is finding the property.
I once had a CEO client who put in an offer on a property only to be turned down by his own bank when they (and he discovered) he had major issues with his credit file. He eventually settled on the house, but it took us weeks of work and a lifetime of stress to fix it. Pre-approval would have avoided all this.
Pre-approval gives you confidence that you can afford a property and that a bank will lend you enough money.
Some Are More Equal than Others
But some pre-approvals are more valuable than others. Until recently, a Big Four bank was offering customers ‘pre-approval’ over the phone. The bank had not actually vetted any information, it just took the person at face-value when they said they earned $x. Imagine going to an auction, believing you had finance set up and then the lender pulled the rug from under you!
Good brokers know which lenders are more rigorous with their pre-approvals.
One of the beauties of the Banking Royal Commission is that the banks are being really rigorous in assessing loan applications – including pre-approvals. This may be a pain when it comes to having to submit evidence of your living expenses or credit card statements. But it means you can have confidence that the bank has had a really good look at you before giving some sort of approval.
Time to Go Shopping
So, once you have your pre-approval, what do you do?
Normally, the only difference between a pre-approval and a full approval is the property. So, once you have your pre-approval you need to find a house. In the current market, here you have to be very clever.
Blind Freddy can see that the market is cooling; you may have a low-ball offer accepted but have a major shock when the bank’s valuer says the property is worth even less and won’t lend you what you need. Some states have ‘finance clauses’ that give you a certain amount of days before you are committed to going ahead with the purchase.
Why Your Broker is Your Best Friend
The best thing you can do is talk to your broker; if there is an offer accepted, they can arrange a valuation for you without locking you in to the purchase. Assuming the valuation comes back fine and the bank accepts it, your broker then works with the lender so that you get a fully un-conditional approval and you can settle on that property.
Getting pre-approval is a must; knowing how it works is key. If you don’t do the preparation, you could lose your home.
If you want to talk more about pre-approval and how that can give ou confidence with your property purchase, please contact me on 1300 30 67 67.