How Pre-Approval Strengthens Your Buying Position
In today’s competitive property market, having a strong buying position is crucial when you’re looking to purchase a home. One of the most effective ways to bolster your position as a buyer is by obtaining pre-approval for your mortgage. Let’s dive into how pre-approval works and why it’s such a powerful tool in your home-buying arsenal.
What is pre-approval?
Pre-approval is a conditional commitment from a lender to provide you with a loan up to a specified amount. It’s an indication that, based on the information you’ve provided, you meet the initial criteria set by the lender. While it’s not a guarantee of final loan approval, pre-approval is a crucial step that demonstrates your seriousness as a buyer and gives you a clearer understanding of your purchasing power.
The pre-approval process
To get pre-approved, you’ll need to submit a variety of documents to a lender, such as proof of income, employment, assets, and debts. The lender will assess these to determine your borrowing capacity. This process also involves credit checks to evaluate your creditworthiness.
Here’s what you’ll typically need to provide:
- Proof of income (e.g., recent payslips or financial statements if self-employed)
- Bank statements showing your expenses and debts
- Evidence of your deposit (savings, KiwiSaver, first home grants)
- Identification documents
It’s worth noting that pre-approvals are usually valid for a certain period, often around three to six months. This gives you a window to find and bid on properties.
How pre-approval strengthens your buying position
- Confidence in budgeting
Pre-approval enables you to determine a realistic budget for your home search. Knowing the maximum loan amount you’re eligible for helps you focus on properties within your price range, saving time and effort.
- Stronger negotiating position
With pre-approval, you’re seen as a serious buyer by sellers and real estate agents. This can give you a significant advantage in competitive markets, as sellers may prioritise offers from buyers with pre-approved finance.
- Ability to act quickly
In a fast-paced property market, being able to move quickly with an offer can make all the difference. Pre-approval allows you to do just that, as you already know your budget and have your finances in order.
- Auction readiness
If you’re interested in properties being sold at auction, pre-approval is essential. Auctions require unconditional bids, and without pre-approval, you won’t be able to participate.
- Faster loan processing
Once you find your dream home, having pre-approval in place expedites the loan application process. Since the lender has already reviewed your financial information, finalising the loan becomes more efficient, reducing the overall time to settlement.
- Rate protection
Pre-approval can also offer protection against potential interest rate increases. If interest rates rise during your pre-approval period, the lender may honour the originally quoted rate, safeguarding you from higher borrowing costs.
Tips for a successful pre-approval application
- Review your finances: Before approaching lenders, take a close look at your financial situation. Clearly set out your income, monthly expenses, debts, and credit score. A strong financial position can lead to better mortgage terms.
- Check your credit score: Your credit score is a crucial factor in the pre-approval process. Obtain a copy of your credit report and ensure there are no errors or outstanding issues. Credit scores are freely available through agencies like Centrix, Equifax, and Illion.
- Manage your debt-to-income ratio: Lenders will assess your debt-to-income ratio to determine how much of your income is already committed to other debts. Lowering this ratio, by paying down debts, can improve your chances of getting pre-approved.
- Maintain employment stability: Lenders look for stability in employment. A consistent work history, preferably with the same employer or in the same industry, is advantageous.
- Consult with a mortgage adviser: Seeking professional advice from a mortgage adviser can greatly enhance your pre-approval prospects. They can assist in optimising your application, reviewing your financial situation, and identifying potential roadblocks before you apply.
A word of caution
While pre-approval can give you a significant advantage, it’s important to remember that it’s not a guarantee of final loan approval. Most lenders will still require information about the property you’re buying before confirming the home loan. This means your sale and purchase agreement may still need to be conditional on finance.
Additionally, while you may be pre-approved for a certain amount, it’s crucial to budget wisely. Consider not just the maximum you can borrow but also what you can comfortably afford to repay, especially considering potential interest rate rises.
In conclusion, obtaining pre-approval is a powerful step in strengthening your buying position. It provides you with confidence, streamlines the purchasing process, and enhances your negotiating position. By understanding the pre-approval process and preparing thoroughly, you’ll be well-equipped to navigate the exciting journey of homeownership.