Why get a pre-approval before you start looking for property?
Firstly, a pre-approval is, as the name suggests, an approval of your loan before it being a formally approved. What’s the difference?, a pre-approval can be issued subject to you finding a property, which means the lender has pre assessed your information such as your income, liabilities, expenses, and savings position to deem you suitable for the loan. The formal approval will only be issued once you commit to a property and the bank has assessed the property and deemed it as acceptable security.
Why is it important to obtain a pre-approval before you start looking?
Peace of mind
Once your loan has been pre-approved, you know that you have been accepted for a loan. This will give your confidence to make offers on properties and even sign contracts knowing your lender is happy to lend you the money for the property. Be careful though, some lenders will issue you a pre-approval without assessing your information, giving you a false hope that you can borrow the money and may end up being costly. These are called system generated pre-approvals. If your lender issues a system generated pre-approval, for them to assess your application manually and issue a proper pre-approval.
Understand your position
A pre-approval will give you the guidelines you need to work with. e.g., if your loan has been approved for a purchase of a property at $600k, you are not going to start looking for property at $1,000,000. You can spend your time looking at property that you can afford rather than looking at properties you cannot.
Understand the loan
Once you have committed to a lender, you will also understand your repayments, interest rates and the term of the loan moving forward. This is important as you get to know that information before you commit to a property. Generally, a loan term is 30 years, it's important to know what you are getting yourself into before committing for 30 years.
Valuation of the property
The bank will carry out their valuation on the property once you have committed to the contract before they issue the formal approval. If the valuer deems the property is not worth the amount you have paid for it, they will only lend to the valuation report. This will give you peace of mind that you are not paying overs for the property.
