When prospective homebuyers start thinking about purchasing a home, one of the most important things to consider is your ability to get finance.
Most borrowers will be constrained by how much a bank will lend them, so before you start looking through open homes, it might be worth taking a step back and closely examining your own financial situation.
The quickest way to understand how much you can borrow is to talk to a mortgage broker. However, it’s possible to take this one step further and get pre-approved by your lender of choice.
As you will see, there are a number of reasons why this is an important first step for serious buyers.
Understand Your Borrowing Capacity
There is no reason to spend your weekends at open homes, for properties that you are simply never going to be able to afford.
When you get pre-approved, you’re going to quickly get a very clear picture of exactly what your borrowing capacity is going to be, which will then shape your decision-making going forward.
Generally speaking, your borrowing capacity is based on your income and expenses. More specifically, a lender will want to see spare capacity to service a loan. Meaning that your income should exceed your expenses comfortably.
Tidy Up Your Financials
Many potential borrowers don’t often pay close attention to their financial situation. In recent years, lending has been particularly tight, and banks have made a point of closely scrutinising borrowers’ expenses.
In some instances, even potential borrowers with high incomes have found it difficult to access finance because of their ongoing expenses, debts and overall lifestyle.
When looking to get pre-approved, this is the perfect opportunity to tidy up your financials and make sure everything looks good to the lender. That gives you the very best opportunity of being able to borrow.
Present a Stronger Offer
When property markets are strong or when there is a particularly in-demand property, the strength of your offer will be important.
Having your finance already in place with a pre-approval means that your offer will be stronger than your competitors. When a property is receiving multiple offers, your subject-to-finance clause will not be as much of a factor if the vendor knows you are pre-approved and able to act quickly.
A pre-approval could well be the difference between securing your dream home and missing out.
Settle Quickly
Going through the process of getting finance is not always that quick, both from the perspective of getting your own financials together, as well as going through the lenders’ assessment process.
When you’ve been pre-approved, you’ve done the bulk of the work already and if you and your mortgage broker are confident, you could potentially put in an offer with a shorter settlement period.
This is particularly powerful when dealing with motivated sellers who want to settle quickly. In some instances, these types of vendors might be willing to accept a lower offer, in return for a fast settlement. A pre-approval at least gives you that option.
Helps With Sales Agents
It’s important to remember that a sales agent only gets paid when the property ultimately sells successfully.
If a property transaction falls over because the buyer is unable to secure finance, that is a big blow to the agent, the vendor and the buyer. But for the agent, it means they need to go back to the drawing board and start again.
Having a pre-approval in place means the sales agent can have more confidence in you as a buyer and will be more willing to work with you to strike a deal. As they understand the odds of them getting paid their commission are higher.
Other Things to Consider
It is important for the potential borrower to understand that not all pre-approvals are created equal. Some lenders will simply run a pre-approval application through their software to get an idea as to whether the potential borrower will stand a chance of being approved.
That’s not what you want as a borrower, as it takes away many of the advantages of having a strong pre-approval in place. This highlights why it is so important to work with a mortgage broker who understands the process.
Make sure your pre-approval is assessed correctly, so you can have the confidence to make a strong offer.
A pre-approval also doesn’t last forever and will only generally be valid for three months. If your circumstances change, it is important to make that known to your mortgage broker, as this will mean you will have to go through the process again.
Being pre-approved is a powerful tool and one that all borrowers need to consider before beginning their property search.
