Why Mortgage Pre-Approval is Important
In today’s red-hot property market, having your finances sorted before you start house hunting is crucial. One of the most important steps in this process is obtaining mortgage pre-approval. Let’s dive into why pre-approval is so vital and how it can significantly strengthen your position as a buyer.
What is mortgage pre-approval?
Mortgage pre-approval is a conditional offer from a lender indicating how much they’re willing to lend you for a home purchase. It’s based on an initial assessment of your financial situation, including your income, expenses, assets, and debts. While it’s not a guarantee of final loan approval, pre-approval gives you a clear idea of your borrowing capacity and demonstrates to sellers that you’re a serious buyer.
The benefits of mortgage pre-approval
1. Clarity on your budget
One of the most significant advantages of pre-approval is that it helps you understand exactly how much you can afford to spend on a property. This clarity allows you to focus your search on homes within your price range, saving you time and preventing the heartache of falling in love with a property that’s beyond your means.
2. Stronger negotiating position
In a competitive market, having pre-approval can give you a significant edge over other buyers. Sellers and real estate agents are more likely to take you seriously if they know you’ve already been vetted by a lender. This can be particularly advantageous in multi-offer situations, where your pre-approved status might tip the scales in your favour.
3. Faster purchasing process
When you find your dream home, having pre-approval in place can speed up the purchasing process. Since the lender has already reviewed your financial information, finalising the loan often becomes more efficient, potentially reducing the time to settlement.
4. Ability to act quickly
In fast-moving property markets, being able to move swiftly with an offer can make all the difference. Pre-approval allows you to act decisively when you find the right property, as you already know your budget and have your finances in order.
5. 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. Having pre-approval in place means you can confidently bid up to your approved limit.
6. Rate protection
In some cases, pre-approval can offer protection against potential interest rate increases. If rates rise during your pre-approval period, the lender may honour the originally quoted rate, safeguarding you from higher borrowing costs.
How to get pre-approved
To obtain pre-approval, you’ll need to provide the lender with a variety of documents, including:
- 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.
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 mortgage pre-approval is a crucial step in the home-buying process. It provides you with clarity on your budget, strengthens your position as a buyer, and can significantly streamline the purchasing process. By understanding the pre-approval process and preparing thoroughly, you’ll be well-equipped to navigate the exciting journey of homeownership.
Remember, the property market can be competitive and fast-moving. Having your finances sorted with pre-approval puts you in the best position to act quickly and confidently when you find your dream home. So, before you start scrolling through property listings, make getting pre-approved for a mortgage your first priority.