What is mortgage pre-approval and why is it important?

Pre-approval

Things are changing in real estate and no-where is this truer than in Christchurch and Canterbury.  It wasn’t long ago the market was hot and regular meetings were taking place with despondent first home-buyers who were trying to save for an ever-increasing deposit.

Not so now – six months is a long time in real estate, things have settled and we are now able to take a breather.  And if you are in the market for the first time you don’t have a moving target of a deposit to aim for anymore.

July’s housing data was sobering – figures from Quotable Value (QV) showed average values creeping up ever so slightly by 0.6 per cent over the previous year.   August data showed prices in Auckland and Christchurch experiencing their slowest growth since 2012.

And while no-one has a crystal ball, with the potential for immigration to shrink and housing stock to be boosted by the new Government, a more sedate pace in the housing market is likely to continue for the foreseeable future.

These are all good signs and should put smiles on the faces of first home buyers across the country. 

In our own backyard in Christchurch there is an oversupply of homes, and prices have weakened.  Whether this is temporary or something more long-term remains to be seen, but one thing is certain - now is a good time to buy a house, as there are more opportunities to find one you want that’s also affordable.

But first you will need mortgage pre-approval from your chosen bank or lender.

What is home loan or mortgage pre-approval?

Home loan or mortgage pre-approval is also called a conditional offer of finance. In simple terms, it is a written acknowledgement from a bank or lender stating that you are allowed to borrow an agreed amount for your home loan, subject to their loan criteria, and other terms and conditions, including property acceptance.

Why is it important?

It is a crucial stage of the home loan process because it means you are serious about your investment and you are taking all the necessary steps to ensure you are able to buy the home you want.

The added financial preparation it requires also gives you the edge when it comes to price and payment negotiations with real estate agents, mortgage brokers, or sellers.  In simple terms, a pre-approval expedites, or hastens, the entire home loan process.

Furthermore, it provides you the buyer with much needed assurance. You’ll be approved for a set amount, which means you already know what you can afford from the start, making the search for a home clearer.  Since you’re backed up by a pre-approved mortgage, you’ll also be more confident when you make an offer or take part in an auction.  In this situation, it’s essential to know how much you can afford before you start bidding and be sure to provide details of the property to ensure the bank has accepted this before the auction and insurance.

Getting pre-approval doesn’t cost anything, so there’s no reason for you not to apply for it.

What are the requirements for pre-approval?

You’ll need to gather a lot of information before applying – this includes (but is not limited to):

  • Identification (eg: passport, driver’s license)
  • Documents to prove your address (eg: bank statements, credit card statements, utility bills)
  • Recent bank statements (3 to 6 months’ worth depending on the lender)
  • Payslips/proof of income
  • Proof of New Zealand citizenship or residency
  • Details of any extended debt, hire purchases, credit cards, personal loans etc.
  • The documents required vary from lender to lender, so verify what you need first to make sure.

You will also need documentation to finalise your mortgage or home loan including a signed sale and purchase agreement approved by the bank, or even insurance.

When should I start applying of mortgage pre-approval?

Depending on the bank or lender a pre-approval will have a shelf-life, usually between 30 and 90 days.  This is because house values can change fairly rapidly, either up or down, and it’s important to have an accurate assessment of what you can afford that reflects the market. 

So it’s unwise to apply too early but it’s also vital to do it before you start looking for a house.  This is more practical and less stressful, because it means taking care of most of the red-tape administration up front.  It also reduces hassle, thereby giving you more time, energy and a clearer head, and helps you avoid any disappointment.

Do I have to get pre-approval?

The quick answer is no, but it’s a whole lot less stressful if you do! 

Ask yourself, what’s the point of spending lots of time finding your dream home, obtaining council reports such as a LIM1 and carrying out other research, only for it to fall over because of finance? 

Banks and lenders can be unpredictable so there’s no point in second guessing their answer.  They may not approve of the area where you’ve found a great house, feel you are stretching yourself beyond your ability to service a mortgage or have other concerns that raise risk.  Whatever it is, disappointment is normally the result and can be hard to swallow.

Our advice is don’t go there and just get pre-approval before you get too far down the house buying track!

How do I improve my chances of getting pre-approved?

1.      Be transparent
If you want to increase your chances of being pre-approved, provide all the information you can.  An application with limited terms and conditions is a sign that your loan has a strong chance of pushing through.

2.      Prepare a deposit
You have a better chance of getting that “YES” stamped on your document if your deposit is at least 20 per cent. If it’s more than that, so much the better and this will just mean you have more flexibility when coming to buy a home.

3.      Clean up your credit
Your lender will check your credit record in order to understand your financial history. It’s best to clear up any defaults and pay off any outstanding loans prior to submitting your application.  Having excessive outstanding debt will just reduce your ability to borrow.

4.      Manage your accounts well
Make sure your bank statements and other financial records are well-managed - your savings, spending patterns, overdrafts, late payments and credit card debts will all be considered.  If your accounts don’t have any surprises, such as unauthorised overdrafts, you will improve your chances of securing pre-approval.

5.      Speak to a mortgage broker.
Using the services of a mortgage broker will not only save you time and effort, but money as well. It’s their job to get you the best possible rates. All you need to do is apply and leave it up to them to talk to different banks and lenders, and provide you with the home loan pre-approval you require.

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So in summary a conditional home loan pre-approval has a lot of advantages – it will mean you can:

  • Borrow a specified amount of money to buy a home, subject to satisfying specific terms and conditions
  • Show real estate agents and sellers you're serious about buying
  • Be in a better negotiating position – having your finance already arranged makes your offer more attractive and helps speed up the process once you’ve found a home you like.
  • Bid confidently at auctions, where the rules are that all bids have to be unconditional

So, talk to a mortgage broker at Taurus Home Loans today. We would be more than happy to look after your needs and help you buy the Christchurch home you’ve always wanted. 

Paul Townsend 
Mobile: 027 352 6262
Phone: 03 366 6087

Website: http://www.taurushomeloans.co.nz/contact/

Notes:

1 – A LIM is a Land Information Memorandum report prepared by the Council and providing information from its records on matters related to the land and any buildings on a particular property.

Posted 1 Nov 2017