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Not all pre-approvals created equal

20/10/2011

When it comes to home loan pre-approvals, it appears not all are created equal.

According to Smartline Personal Mortgage Advisers, people who want to go house hunting with complete confidence knowing that they will be able to get a loan and how much they can borrow, would do well to be cautious about the type of pre-approval they secure.

Smartline’s Managing Director Chris Acret said there were several different types of pre-approvals and borrowers needed to know what exactly they were getting.

“In some instances, the pre-approval process can be pretty basic if the lender has just done an initial credit check and reviewed the borrower’s credit score, providing a conditional approval,” he said.

“If the lender hasn’t actually looked at a full application and reviewed the borrower’s individual circumstance, they’re really just saying ‘yes, you can probably have a loan’ rather than ‘yes, you can have a loan and this is how much we’re prepared to lend to you’ – there’s obviously a very big difference between the two.

“Some lenders do a more detailed pre-approval that provides the borrower with a lot more confidence. Armed with this, they know exactly how much they can afford to borrow – so minimise the chances of wasting time looking at properties outside their budget – and that the lender is actually comfortable lending them that amount.”

Potential home-buyers should be cautious about going through the pre-approval process out of curiosity or if they’re not really serious about looking for a property, particularly if they do so several times.

This is because seeking a formal pre-approval puts a credit enquiry on the person’s individual client record. If you have too many credit enquiries within a short period of time on your credit record, this is seen as a negative by the bank as you are viewed as ‘shopping for credit’.

Lenders use a complex process called credit scoring when assessing your application for finance. Numerous credit enquiries can considerably lower your credit score and damage your chances of securing a loan approval when you are ready.

Those people not yet ready or comfortable with going through a formal pre-approval process would benefit from working with a trusted mortgage adviser, who can advise them on the likelihood of securing a home loan and the likely borrowing amount.

“Quality mortgage advisers have access to detailed information about the products and policies of the various lenders, and can perform a credit check to confirm that you have a sound credit history,” Mr Acret said.

“Good mortgage advisers know what the banks are looking for, such as long-term employment, stable living arrangements, a strong financial position (relative to the person’s age), a low level of unsecured debts and the capability to service the loan.

“They will be able to give you an idea as to whether you would be likely to secure a loan and, if so, how much you’d be able to borrow.”

Mr Acret said working with a mortgage adviser was also a useful process for people who were unsure of their home buying budget.

“Rather than the client saying ‘I’ve seen a $400,000 house I like, can I afford it?’, the process works backwards.

“The mortgage adviser will talk with the client about what level of home loan repayments they’re comfortable with. Say, for example, a person was comfortable with home loan repayments of $600 a week, the adviser could work out that, all things being equal, they could probably afford a loan of around $390,000 at 7% interest.

“If they had a 10% deposit and the fees and charges saved, and capitalised the LMI, they would then know they could look at a property with a purchase price of about $425,000.”

With the increasing competition in the home loan market, it’s important to be talking with your mortgage adviser on a regular basis, as they might be able to get you a better deal than the pre-approval you secured previously.

As always, talk to your Smartline Personal Mortgage Adviser for more information.

 

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