Loan pre-approvals, and the pitfalls for home buyers

Not all pre-approved home loans are created equal,
here are 5 tips home buyers should know.

The level and type of pre-approval a lender offers can vary significantly in terms of reliability, conditions, and the assurance it provides to buyers and sellers. Here’s why:

1. Type of Pre-Approval

• Indicative Pre-Approvals:
• • These are quick assessments based on limited information, like income and expenses.
  • Often automated and not formally reviewed by the lender.
  • Risk: They may not hold up during the formal approval process because they lack a thorough financial review.
  • The key purpose of this level of approval is to give home buyers an initial estimate of your borrowing capacity.
• Conditional Pre-Approvals:
  • These involve a more detailed check of your financial documents but still include conditions, like property valuation or additional documentation.
  • Reliability: More dependable than indicative pre-approvals but not guaranteed until all conditions are met.
  • Key purpose of this level of approval is often used to help you confidently make offers on properties.
•  Fully Assessed Pre-Approvals:
  • The lender conducts a full assessment of your financial situation, verifying documents like payslips, credit history, and liabilities.
  • Strength: Most reliable; the only condition left is the property itself. Sellers and agents often treat these like full approvals.
  • Key purpose of this level of approval is to give you the strongest position as a buyer since, it’s close to a formal loan approval. Often a fully assessed pre-approval is treated similarly to cash offers by sellers.Higher levels of preapproval (like fully assessed) show sellers you’re a serious buyer. And it can assist with a faster loan purchase by streamlining loan approval once you have found your property.

2. Lender Differences

• Different lenders have varying processes, and some may label “pre-approvals” differently:
  • Some lenders offer pre-approvals that are closer to full approvals.
  • Others may give very loose or “low commitment” pre-approvals that are more like indicative estimates.
• Tip: Always ask the lender how thorough their pre-approval process is.

3. Validity Period

• Pre-approvals typically last 3-4 months. However, if your financial situation changes (e.g., new debts, job change), it could invalidate the pre-approval.
• Different lenders may have varying validity periods and flexibility in extensions.

4. Conditions & Restrictions

• Some pre-approvals come with conditions like:
  • Limited to specific types of properties (e.g., not allowed for certain high-density apartments).
  • Subject to additional checks like valuation or updated income proof.
• Important: Understand the specific conditions attached to your pre-approval.

5. Why a Pre-Approval Matters for Buyers

• Pre-approvals are certainly not a waste of time, the three top reasons they matter:
  
• Confidence: A fully assessed pre-approval allows you to bid with certainty.
• Negotiating Power: Sellers and agents are more likely to accept offers from buyers with stronger pre-approvals.
• Avoid Surprises: A weaker pre-approval may result in delays or rejections during the formal loan process.