TIP Pre-Approval also known as a conditional approval or a preliminary approval, is an offer by the lender to lend you up to a certain amount of money. Depending on the lender, a pre-approval is valid from 3 to 4 months. By getting pre-approved, you know how much a lender will lend you and the value of the property you can purchase.
For example, a pre-approval for a $400,000 loan will be linked to a property value of $500,000 (using the 20% as the base for the deposit). In this example you can feel confident that the lender will lend you the $400,000 providing the valuation for the property you are purchasing comes under $500,000.
Achieving a pre-approval requires almost a full loan application. The lender will assess everything up front as part of the pre-approval process, which often makes the final approval phase less time consuming and less complicated.
There are several reasons why you should consider getting pre-approved for a loan. Consider that you are selling a house and your agent presents you 2 offers for the same price. One is a cash buyer whilst the second needs loan approval. Which buyer are you likely to accept? Most likely you will take the cash buyer as it provides more reassurance that your sale will go ahead once the contract is signed. A pre-approval is similar, as it provides a certain amount of certainty for the seller. Therefore, property agents also prefer buyers with pre-approved lending as it provides more certainty to the sale. It’s fair to say that a pre-approval may assist you in securing a property over another potential buyer without pre-approval.
TIP Depending on the property market, a pre-approval is likely to give you additional negotiating power that can influence the buying price of the property. This is certainly more likely when the properties market is slow and there are more sellers than buyers.
Having a pre-approved loan in place is also preferred if you are bidding at an auction where the last man standing buys the property unconditionally. In this instance always keep the maximum property value in mind and the likelihood that the valuation needs to match the bidding price. If in doubt, seek advice from your Mortgage Broker
Pre-approval also provides an element of comfort to the seller, particularly if they are in buying another property and will be relying on your purchase to settle their own sale. In this situation, a seller may prioritise your offer higher and, be more negotiable with their price, particularly if they have already found their next dream property.