Mortgage pre-approval, is it worth the effort?
It’s easy to get carried away with the fun part of buying a property; looking at houses & imagining where all your furniture would go, but delaying the less compelling task of arranging finance will weaken your negotiating position on both the property and the loan.
Looking for a property to purchase is an exciting time. Choices regarding location, size, number of rooms and local amenities often see house hunters carried away in a deluge of daydreams and anticipation. But, before you get carried away, it’s important to check off the essentials first. Although organising your finances may seem drab in comparison to perusing sales listings & thinking about paint colours, gaining pre-approval on your home loan will give you complete confidence about how much you can afford to borrow & avoid some nasty pitfalls.
Don’t go shopping blind
Would you wear a blindfold & have someone else hold your wallet/ purse when shopping for a new shirt? Not likely, but going shopping for a new house without first exploring your finance options is almost the same thing. Here’s why:
Each lender has its own particular set of criteria on the types of houses and clients they are willing to provide a mortgage for, so first and foremost its important to make sure there are lenders out there that fit with your specific scenario. This might be related to how long your business has been operating for, how long you have been in your current job, or whether the properties you are interested in are in rural location, for example.
Next its important to understand how much you can afford to borrow. Many free calculators found online can be inaccurate, and grossly overestimate the affordability of a mortgage. Each lender will also have its own policy for calculating a customers ability to comfortably make repayments on the proposed loan. All lenders will calculate this using an affordability buffer, to ensure that the loan will still be affordable, even with reasonable interest rate variations. Again, the amount of buffer that each lender requires is specific to them.
At this stage its also important for you to understand the repayment amount required (and how this may change with interest rates) so that you can decide if you are comfortable, and if it fits in with any plans you have in the near future, like having a child, for example. You can then go shopping for houses, being fully informed about your purchase budget, the associated repayment amounts, and any lifestyle changes that might be required to purchase a house at that amount.
A good finance broker is worth their weight in gold when shopping for a new home (and home loan). Its their job to understand what products each lender offers, and the specific parameters involved with each. They can then quickly match your requirements to the right lender, and in some cases negotiate a better interest rate on your behalf.
Be in a better bargaining position
By having an approval in place prior to finding your dream home, it means that when you do find it, you can quickly present an offer to the seller as a prepared applicant who is serious and reliable. Having your finance already approved shows you mean business, and gives the seller peace of mind that your financing will not fall through. This may translate into a better bargaining position on price, or being the more attractive offer if you are in competition for the property with another buyer. It also gives you guidance on what the upper limit of your offer should be, if you get into a bidding war with another buyer.
Avoid the pitfalls of not doing the boring stuff first
In the instance that you find and secure purchase of a home without having your loan pre-approved by a lender, there are a few pitfalls that you risk running into.
You may have to forfeit your deposit, if you aren’t able to secure finance in time.
You may overcommit yourself, to a level of repayments that are not comfortable with your current lifestyle.
Your credit report may include information that you didn’t know about, or which is inaccurate and needs correcting, which may delay the settlement process. You can obtain a free copy of your credit report here.
Having a settlement deadline also means more pressure to shop around, get informed about your choices and provide all the necessary paperwork required by the lender.
If you are interested in talking to us about your next home purchase, please call (08) 8224 0044, or email info@capequity.com.au.
A 60 second repayment quick quote is also available.
